With all the buzz on executive compensation coming out of The Conference Board Governance Center Fall Corporate/Investor Summit in New York City on Friday, I thought it would be a good idea to share some of the latest reading material on the subject.
In addition to the focus on The Conference Board Task Force on Executive Compensation report, some of the speakers and attendees cited other publications that might give you all some insight on compensation guidelines before the next proxy season starts. For instance, at the Investor Summit Anne Sheehan, director of corporate governance for the California State Teachers’ Retirement System (CalSTRS) made mention of her organization’s executive compensation model policy guidelines and Arthur Kohn, partner at Cleary Gottlieb Steen & Hamilton LLP cited one of Lucian Bebchuk’s recent Harvard Law School working paper, The Wages of Failure: Executive Compensation at Bear Stearns and Lehman, 2000-2008. (See below.)
Executive compensation is an issue that will stay on the shareholder radar for some time to come as the Special Pay Master Kenneth Feinberg continues to oversee the pay of top executives at TARP companies and Congress considers several corporate governance measures over the next few months. With that said, here are some publications on the subject that are worth reading:
- The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008, Lucian Bebchuk, Director of the Program on Corporate Governance, Harvard Law School; Alma Cohen, Harvard Law School professor; Holger Spamann, Executive Director of the Program on Corporate Governance, Harvard Law School. Nov. 22, 2009. http://www.law.harvard.edu/faculty/bebchuk/pdfs/BCS-Wages-of-Failure-Nov09.pdf. Key findings: This working paper finds that according to the standard narrative, the meltdown of Bear Stearns and Lehman Brothers largely wiped out the wealth of their top executives.
Many in the media, academia and the financial sector have used this account to dismiss the view that pay structures caused excessive risk-taking and that reforming such structures is important. That standard narrative, however, turns out to be incorrect.
The authors discuss the implications of their analysis for understanding the possible role that pay arrangements have played in the run-up to the financial crisis and how they should be reformed going forward.
- Executive Compensation and Earnings Management under Moral Hazard, Bo Sun, Economist, Board of Governors, Federal Reserve System. August 2009. http://ssrn.com/abstract=1477552. Key findings: The author creates a model that shows there is a positive association between earnings management and incentive compensation. She suggests that the model she developed may be useful for studying the issues of how incentives and pay vary across firms. It is natural to think that managerial manipulation of financial data incurs a larger personal cost in the firms with more effective internal corporate governance, she wrote.
- Executive Compensation: Facts, Gian Luca Clementi, Professor, New York University; Thomas F. Cooley, Richard R. West Dean and Professor, New York University, and National Bureau of Economic Research (NBER). October 2009. http://www.nber.org/tmp/18897-w15426.pdf. Key findings: This paper, which looks at the important features of U.S. executive compensation from 1993 to 2006 with an update for 2008, finds that the compensation distribution is highly skewed; each year, a sizeable fraction of chief executives lose money; the use of equity grants has increased; the income accruing to CEOs from the sale of stock has increased; measured as dollar changes in compensation, incentives have strengthened over time, measured as percentage changes in wealth, they have not changed in any appreciable way.
- Schering-Plough Announces Results of Survey on Compensation, Susan Ellen Wolf, former corporate secretary, vice president of corporate governance and general counsel, Schering-Plough. Oct. 30, 2009. http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTkwOTh8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1. Key findings: This press release from Schering-Plough, which is now part of pharmaceutical giant Merck & Co., gives the results of a year-long survey of Schering-Plough shareholders. The eight-question survey was the first time the board reached out directly to shareholders on the issue of executive compensation. With the services of Richard Koppes, former general counsel of California Public Employees’ Retirement System (CalPERS), the compensation and nominating and corporate governance committees were able to gauge the sentiments of about holders of about 0.50 percent of outstanding shares. For the most part, those shareholders responded favorably to the board on such issues as retention, performance-based pay and proxy statement transparency.
- Goldman Sachs Outlines Compensation Methods to Shareholders, Bloomberg News, Dec. 3, 2009. http://www.bloomberg.com/apps/news?pid=20601103&sid=aj5CUuYxfE2Q. Key findings: A news article that details how Goldman Sachs Chair and CEO Lloyd Blankfein has been meeting with shareholders since October to explain the investment bank’s executive compensation policies in light of the company paying out large bonuses a year after the financial crisis in which the company took federal bailout money. The article cites a 14-page memo from Blankfein in which he details the firm’s compensation practices, such as a prohibition on multi-year guaranteed pay contracts and a higher percentage of stock paid to the employees who earn the most.