Tag Archives | ceo

Video: Heads or Tails? The Art and Science of Executive Compensation

SVDXAll directors are keenly aware of their responsibility in setting executive and CEO compensation. Increased external pressure on — and opinions about — CEO pay and more crowded meeting agendas limit the available time for meaningful discussion and make this role more challenging than ever. The stakes in getting executive compensation right are high, with real opportunities to engage leadership and drive business results, but also with real risks of poor outcomes. Continue Reading →

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Heads Or Tails? The Art And Science Of Executive Compensation

SVDXI thought the title of the program referred to heads I win, tails you lose. Now, I’m thinking ‘art’ is one side of the compensation committee coin, ‘science’ the other. Titles that keep us on our toes – just like the programs held by the Silicon Valley Directors Exchange and the Rock Center for Corporate Governance at Stanford Law. The stakes in getting executive compensation right are high, with real opportunities to engage leadership and drive business results, but also with real risks of poor outcomes. As advertized: Continue Reading →

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The Coca-Cola Company (KO): How I Voted – Proxy Score 63 – Things Go Better With a Split CEO/Chair

CokeThe Coca-Cola Company $KO, is one of the stocks in my portfolio. Their annual meeting is coming up on 4/23/2014. ProxyDemocracy.org had collected the votes of four funds when I checked and voted on 4/15/2014.  I voted with management 63% of the time.  View Proxy Statement, which by the way is very nice and user friendly. See 18 Cool Things about the proxy.

Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime) Continue Reading →

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Moving Day: Taking Out the Founder


Networking; big part of program

Networking; big part of program

As Advertised

A passionate, visionary founder has the start-up organized and funded and captured first customers, but does not have the experience (or skill set) to scale the company to a liquidity event. The need to move the founder from CEO to an executive technical position or “just” a member of the board and an investor is more the rule than the exception in Silicon Valley. Unfortunately, this transition is often badly handled, turning the founder from a major asset to a bruised critic at best, and a passive aggressive saboteur of the CEO at worst. This program will focus on the planning and execution that can make this transition a positive one for all stakeholders. Continue Reading →

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Take Action: Comments on SEC Pay Ratio Rule Due 12/2/2013

The deadline for submitting comments on the SEC’s proposed pay ratio disclosure is coming up quickly on December 2, 2013. SEC general comment instructionsSubmit Comments on S7-07-13 Pay Ratio Disclosure. Get your comments in soon, before Thanksgiving. Another advantage to earlier submittal is that those who wait for the deadline are likely to borrow from previous submission. The earlier you submit, the more likely you are to influence others. For example, I am impressed by comments from the following: Continue Reading →

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Proxy Advisor Competition at Cisco OK'd by SEC


Mark Latham came up with a brilliant idea in the late 1980s: Shareowners should use their corporation’s funds to pay for external evaluations of governance and performance of the board and management. Shareowners would vote to choose among competing organizations to provide this service.

It was a simple concept but SEC rules made subsequent proposals unnecessarily complex and excluded advice on director candidates, often among the most critical decisions on a proxy. Continue Reading →

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Noteworthy Proposal to Cap Pay Ratio at Microsoft (MSFT)

qube-logomicrosoftA proposal by Qube Investment Management, which owns 10,208 shares of Microsoft ($MSFT), to cap pay has been challenged through the “no-action” process. See incoming correspondence to the SEC. The resolved clause of Qube’s proposal reads as follows:

Resolved: The the Board of Directors and/or the Compensation Committee limit the average individual total compensation of senior management, executives and all other employees the board is chanted with determining Continue Reading →

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How I Voted: Johnson & Johnson (JNJ) – Proxy Score – 76%

Johnson & Johnson ($JNJ) is one of the stocks in my portfolio. Their annual meeting is coming up on 4/25/2013. ProxyDemocracy.org had collected the votes of three funds when I checked on 4/22/2013.  I voted with management 76% of the time.  View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime)

I generally vote against pay packages where NEOs were paid above median in the previous year but make exceptions if warranted. According to Bebchuk, Lucian A. and Grinstein, Yaniv (The Growth of Executive Pay), aggregate compensation by public companies to NEOs increased from 5 percent of earnings in 1993-1995 to about 10 percent in 2001-2003. Continue Reading →

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Corporate Directors Forum – Day 2

This is the last in my series on the Corporate Directors Forum 2013. See materials, slideshowCorporate Directors Forum 2013: Bonus Session, and Corporate Directors Forum 2013 – Day 1, Part 1, and Corporate Directors Forum: Day 1, Part 2. The program was subject to the Chatham House Rule, so there will be little in the way of attribution below but I hope to provide some sense of the discussion. I throw in a lot of opinions. Some are those of panelists, some are mine, and some came from the audience. Continue Reading →

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Call for Papers – Journal of Corporate Finance

Since the Cadbury Report was published in 1992 in the UK, there has been increasing emphasis not just by UK regulators but also by regulators from other countries, including the USA and Continental Europe, of the role of boards of directors in corporate governance. However, 20 years down the line it is still uncertain whether boards of directors are able to fulfill the important role they have been assigned by regulators. Continue Reading →

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Cisco: How I Voted – Proxy Score 83%

Cisco ($CSCO) is one of the stocks in my portfolio. Their annual meeting is coming up on 11/15/2012. ProxyDemocracy.org had collected the votes of five funds when I voted on 11/8/2012.  I voted with management 83% of the time.  View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank will be voted in favor of management’s recommendations. (See Don’t Let Companies Change Shareholders’ Blank Votes) Continue Reading →

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Call for Papers: Inside the Board Room

Since the Cadbury Report was published in 1992 in the UK, there has been increasing emphasis not just by UK regulators but also by regulators from other countries, including the USA and Continental Europe, of the role of boards of directors in corporate governance. However, 20 years down the line it is still uncertain whether boards of directors are able to fulfill the important role they have been assigned by regulators. For example, the academic literature on the impact of board composition, in particular the proportion of outside, non-executive directors, is as yet inconclusive as very few studies have Continue Reading →

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Independent Board Oversight: Lessons from HP

Note: Republished with permission of the author. Originally published on the Bloxham Voice as Independent Board Oversight, 4/10/2011. Copyright The Value Alliance.

Nominating and governance processes and independent board oversight: Do they really matter? If so, to whom?

In a Digest publication late last year, I wrote about an ISS policy survey that found investors, in all markets, ranked board independence as the most important governance topic.

Of course, there are a number of ways independence is important. One is the independence of board members (including independent mindedness). Another is effective independent board oversight. Paralleling these are independent processes to nominate directors.

In a January 28 article for Fortune.com, I wrote:

HP’s 2010 proxy explains that the nominating and governance committee, Continue Reading →

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Moody's Shareowners Vote to Split Chair/CEO

At the annual meeting of rating agency Moody’s Investors Service, a resolution calling for an independent Chairman of the Board was supported by 56% of shareowners. The resolution was co-filed by Hermes Equity Ownership Services (EOS) and the Laborers International Union of North America (LIUNA).”

Citing both the Corporate Core Principles and Guidelines of the California Public Employees’ Retirement System (CalPERS) and the Millstein Center for Corporate Governance and Performance, the resolution stated,

We believe that the recent economic crisis demonstrates that no matter how many independent directors there are on the Board, the Board is less able to provide independent oversight of the officers if the Chairman of that Board is also the CEO of the Company.

via Institutional Shareowner.

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Search Continues at footnoted.com for Another Frugal CEO

Frugal gourmets? Yes. Frugal CEOs? Not so much. I really enjoy Michelle Leder’s posts at footnoted* and was stopped in my tracks with her recent headline that appeared to announce that she had found another frugal CEO, aside from Warren Buffett. 

The proxy filed by Dresser-Rand (DRC) indicated they had “agreed to purchase Mr. Volpe’s home in Olean, New York and all personal effects included therein for $267,500, which was their appraised value.”

Cheap digs for a CEO, even for upstate New York. Unfortunately, with a little digging, Leder found additional payments for new digs in or near Paris, a monthly housing stipend, and more money to cover the tax bill. She concludes:

We guess we’ll just have to keep looking. We’re in the midst of proxy season right now and perhaps one will turn up in the pile one day soon.

via Could there be another frugal CEO out there? | footnoted.com, 3/31/2011.

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Aspirational Pay for CEOs

Goodyear CEO, Richard Kramer, saw a 69% rise in his annual compensation to $8.5 million in 2010, according to an Associated Press calculation from a regulatory filing. The company reversed a 2009 decision to freeze executive officers’ salaries, Bloomberg reports. Meanwhile, the largest US tire maker reported a loss of $216 million for 2010, which included a $160 million charge to close a 1,900-employee plant in Union City, Tennessee.

Goodyear is a prime example of the many US companies that are granting bonuses to its executives despite suffering a loss in revenues. US likely to tweak its executive compensation schemes, Corporate Secretary, 3/30/2011.

Apparently Kramer is being paid base on aspirations, rather than actual performance. That’s one of my aspirations too, get paid for my dreams, rather than reality. Nice work if you can get it. Corporate Secretary also reports, UK firms may begin to lengthen executive remuneration schemes from three years to five, a change that would put pressure on other major companies to change the way they reward senior managers.

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Fix CEO Compensation by Broadening Incentive Pay

The defenders of executive compensation argue that senior executives make the most significant contribution to a company’s success; ergo, outsize compensation is justified. But the NBER Shared Capitalism Research Project has shown the opposite: Distributing rewards across the corporation—sharing them with workers—is the most efficient way of making businesses more successful. Motivated employees are more productive and spur innovation in products and processes…

Freeman, Blasi, and Kruse propose a simple way to encourage companies to follow the Googles and Wegmans of the world: Allow them to deduct incentive pay as a cost of business only if they offer the same incentive program to all workers. In other words, don’t give tax breaks to companies that provide stock options and bonuses to only a few executives. This would correct a major loophole in the tax system with which corporate executives have been enriching themselves at the expense of their stockholders and taxpayers. (The U.S. Tax Code does not allow the deduction of salaries beyond $1 million as a business expense, but it does allow companies to deduct as a cost of business any amounts paid as incentive compensation.)

This proposal is not as radical as it may seem. It is, rather, American capitalism at its best, the extension of a system that has engendered the success of such major companies as Google (GOOG), Apple (AAPL), and Procter & Gamble. The same principles already apply to pension and health-care plans—these are deductible as a cost of business only when they cover every employee. Compensation should be subject to the same rules, which will encourage more companies to extend incentive pay to all workers. And most importantly this change would make U.S. businesses more productive while benefiting workers.

via How to Fix Oversize Executive Compensation – BusinessWeek, 3/25/2011.

According to Corey Rosen, National Center for Employee Ownership:

The ideas here make sense. We have become infatuated with the idea that companies rise and fall based on a few key people. Yet study after study (and the rhetoric of CEOs insistent that “people are our most important asset”) show that the level of employee engagement at work is the single most important determinant of corporate performance. Engaged employees come up with the ideas, large and small, that move companies forward. Companies that share ownership widely grow 2-3% per year faster than would have been expected to otherwise, for instance, their employees have three times the retirement assets, and they are much less likely to go bankrupt.

As I recall, much of the research into employee ownership and worker participation showed tremendous gains when these factors were linked. There was a raft of experiments in the 1970s and 1980s. I, myself, was somewhat involved with Rath Meatpacking when it became the largest worker-owned firm in the United States. In many of these situations productivity shot up but management shut them down because employee participation took power away from them… especially middle management. I like the ideas advocated by Freeman, Blasi, and Kruse. Unfortunately, the Business Roundtable and the US Chamber of Commerce are likely to express strong opposition.

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Are High Paid CEO$ Looking for Acceptance?

People who feel more secure in receiving love and acceptance from others place less monetary value on their possessions, according to new research from Edward Lemay, assistant professor of psychology at UNH, and colleagues at Yale University.

Lemay and his colleagues found that people who had heightened feelings of interpersonal security — a sense of being loved and accepted by others — placed a lower monetary value on their possession than people who did not.

In their experiments, the researchers measured how much people valued specific items, such as a blanket and a pen. In some instances, people who did not feel secure placed a value on an item that was five times greater than the value placed on the same item by more secure people.

“People value possessions, in part, because they afford a sense of protection, insurance, and comfort,” Lemay says. “But what we found was that if people already have a feeling of being loved and accepted by others, which also can provide a sense of protection, insurance, and comfort, those possessions decrease in value.”

“These findings seem particularly relevant to understanding why people may hang onto goods that are no longer useful,” Lemay says. (The more secure you feel, the less you value your stuff, ScienceDaily, Mar. 3, 2011) Could they also be relevant to understanding why many CEOs seek pay way beyond what they can meaningfully use for their own needs?

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Just How Clever Are Directors on Pay Issue?

Interesting post from Dominic Jones, brilliant author of the IR Web Report, who wonders if directors fumbled, given that so many three year Say When on Pay proposals are being voted down. Or did directors intentionally channel investor anger “towards the less important of the two say-on-pay proposals.”

Such a diversionary tactic gives “a window-dressing opportunity to their institutional investors,” writes Jones. When funds disclose their votes, they can seem to take a hard line, while taking attention away from the fact that they are also voting in favor the more concrete executive pay proposals. “In fact, 87% of pay votes so far have received more than 80% support from investors.” (Say-on-pay frequency battles a clever diversion | IR Web Report, 2/25/2011)

Interesting theory, but I don’t really see directors taking that much interest in providing cover to funds so that fund managers can say they “stood up for the little guy.” The driver here is more likely to be proxy advisory firms that have drawn a line in the sand that is easily understood, publicized, and followed.

Investors can easily understand, “give me power every three years or give me power every year.” What we can’t understand, unless we devote a lot of resources to filling out scorecards on executive pay proposals using the typical metrics used by large and conscientious institutional investors,  is whether or not we should vote in favor of a board’s pay proposal.

We often know in our gut that the bottom line pay that a proposal yields will be outrageous. But aren’t basketball players paid outrageous amounts too? Unless we’re willing to crunch all the numbers, we generally vote with the board’s recommendation.

While I’m all in favor of incentives to increase the holding period on option and/or stock grants, clawbacks for unearned bonus and incentive payments, cutting back on absurd perks, tying bonuses to performance that take into account market movements and peers, limits on severance or change-in-control payments, and the myriad of other details these good governance funds are concerned with, I also think we also need a few simple overarching guidelines.

  • Will the CEO earn more than 100 times the average worker?
  • Will they take more than 5% of the company’s net profit?
  • How are funds voting that actually put themselves out there by announcing their votes in advance on ProxyDemocracy.org?

I’m sure there are more simple guidelines and these examples may not be the best. As I said in a recent post, which I’m delighted Jones cites (Addressing CEO Pay), members of the United States Proxy Exchange will soon begin working on a paper to address the issue of CEO pay. I’ll be advocating a few simple metrics to ratchet down the “Lake Wobegone effect” and to help wean America away from what has increasingly become a “winner take all” mentality.

As long as directors keep thinking their company’s CEO is above average, the average will keep going higher and higher every year as the baseline comparison rises. Between 1980 and 2004, real wages in manufacturing fell 1%, while real income of the richest one percent rose 135%. The top 1% average $3.2 million a year, while the bottom 90% average $31,000 based on 2008 data. The top 1% control 35% of America’s net worth, while the bottom 90% control 27% based on 2007 data. (It’s the Inequality, Stupid, Mother Jones, 3-4/2011) Looking at the world as a whole, the richest 1% control 43% of total assets according to The Economist (More Millionaires Than Australians, 1/22/2011), whereas the bottom 50% control 2% of assets.

I don’t think we should wait for these gaps to widen further before taking action. If average CEO pay for S&P 500 firms moved from the current $9.25 million per year to $4.6 million a year, would average CEO performance be cut in half? I doubt it. Conscientious institutional investors will go after the outliers, the most outrageous examples. Somebody needs to go after the herd. Let’s make use of the pay ratios that have to reported in the CD&A because of Dodd-Frank while we still can.  That requirement could be gone before we know it the way things are headed in Congress.

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Founders Directors: Better Board Monitoring

Feng Li and Suraj Srinivasan examine CEO compensation, CEO retention policies, and M&A decisions in firms where founders serve as a director with a non-founder CEO (founder-director firms). They find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay for performance sensitivity for non-founder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared to non-founder firms. Bottom-Line: Boards with founder-directors provide more high powered incentives in the form of pay and retention policies than the average U.S. board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared to non-founder firms.  (SSRN-Corporate Governance When Founders are Directors by Feng Li, Suraj Srinivasan, 1/8/2011)

CEOs in founder-director companies have higher pay-for-performance sensitivity (PPS) than CEOs in non-founder firms. For non-founder firms, the average CEO’s annual total compensation including the change in value of stock and option holdings increases by about $5.20 for a $1,000 increase in the market value of the firm. For firms with a founder-director the additional PPS is $2.24. In addition, after controlling for other economic determinants of pay level, CEOs of founder-director firms receive lower pay than CEOs in non-founder firms. We interpret this as lower excess pay due to better governance in these firms (Core et al., 1999). In terms of economic magnitude, CEOs of founder-director firms, on average, receive $329,000 less than CEOs of non-founder firms in annual compensation after controlling for other economic determinants of pay.

Second, CEOs in founder-director firms are more likely than those in non-founder firms to be replaced for poor performance. A decline in performance from the top to bottom decile in performance increases the likelihood of a forced CEO turnover by almost 8.3% more in founder-director firms compared to non-founder firms. Lastly, we find that the three-day M&A announcement return is 1.29 % higher for founder-director firms than other firms…

Results suggest that the founder’s role extends to more effective board level monitoring and not just to superior executive performance as documented in prior research. The higher PPS, lower excess compensation, and higher turnover-performance sensitivity are uniquely associated with founder-directors.

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CEO Pay in an Age of WikiLeaks: Reporting, Rationale and Ratios

As has been widely reported, WikiLeaks will soon release thousands of documents revealing malfeasance, greed and incompetence at the highest levels of a major American bank, most likely Bank of America. According to WikiLeaks’ Julian Assange, this may be the biggest expose of unethical corporate behavior since the Enron scandal. (Facing Threat From WikiLeaks, Bank Plays Defense, NYTimes, 1/2/2011) For broader “leaks,” see Ex-Banker Gives Data on Taxes to WikiLeaks, NYTimes, 1/17/2011.

This will focus new attention on the subjects of greed, fraud and abuse at the highest levels of Corporate America. See Gary Larkin’s post, Wikileaks Episode Should be Wake-Up Call for Companies. (The Conference Board Governance Center Blog, 1/14/2011)

Last year’s Dodd-Frank bill includes Section 922, which provides that the SEC must pay rewards to whistleblowers who provide original information about violations of the federal securities laws that leads to successful enforcement actions resulting in more than $1 million in penalties. (Concerns Grow Over New Dodd-Frank Act Whistleblower Provisions). Additionally, a pay disclosure rule will require many U.S. companies to report the ratio of CEO pay to median employee pay in the annual proxy statements and also requires votes on corporate proxies concerning how often shareowners will have a “say on pay.”

A recent Towers Watson poll of 135 U.S. publicly traded companies found that 51% expect to hold annual say-on-pay votes, while 39% prefer the vote be held every three years, and 10% anticipate holding biennial votes. Meanwhile, nearly half 48% of companies surveyed are making some adjustments to their executive pay-setting process, while 65% are devoting more attention to explaining their programs in the Compensation Discussion & Analysis (CD&A). Some of the best advice for companies on these issues can be found regularly at CompensationStandards.com, including a program today, The Proxy Solicitors Speak on Say-on-Pay.

Clearly, the issue of executive pay is one that stay with us for years to come but 2011 could set the tone, not just in America but around the world. One of the more interesting discussions I’ve read is in the recent posts of an an Indian blogger, Sonia Jaspal, who cites a recent report of COSO “Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies,” which states that CEOs are involved in 72% of the 347 alleged cases of fraudulent financial reporting listed with SEC during 1998-2007 period. (see Fraud Symptom 1- Insatiable hunger of CEO, Fraud Symptom 2- A Weak CFO, and Fraud Symptom 3 – Board’s failure to exercise judgment. We need mechanisms to reduce the likelihood of collusion between CEOs and CFOs, such as making directors and/or audit committee responsible for recruiting and terminating CFOs and not linking CFO pay to stock market performance.

Shareowners are also grappling with how to address the issues. Manifest, a UK-based proxy advisory firm has something of an advantage, since UK shareowners have had a say on pay for many years. See an example of relatively recent discussion at “Excessive” bonuses lead to higher dissent. Other sources of advice include books such as Money for Nothing: How CEOs and Boards Enrich Themselves While Bankrupting America and the classic Pay without Performance: The Unfulfilled Promise of Executive Compensation.

Members of the United States Proxy Exchange have initiated a forum to discuss where individual shareowners and USPX should come down on pay issues. Get in on the conversation for $3.95 a month, if only to monitor what direction this increasingly influential group will take. There are thousands of sites providing investment advice but USPX is one of only a few on investors as owners.

While I have often advocated that any any principles regarding limits should be grounded on academic research, it is difficult to envision a mass movement based on the complex formulas and principles contained in most CD&As, even if they may be grounded in research. Should founding CEOs be given a pass? I don’t think so. CEOs like Steve Jobs of Apple and John Mackey of Whole Foods can easily afford to work for minimum wages because they own a substantial portion of their companies. Their real pay comes through ownership, not by working.

CEOs will try to convince their boards they should be paid in the top 25% of their peers and we have the Lake Wobegon Effect. Since companies will be reporting the ratio of annual CEO pay to median annual total compensation for all employees, that number may drive a popular movement. What will be considered fair? 1 to 25? 1 to 50? 1 to 100? 1 to 200?

In 2007, CEOs in the S&P 500, averaged $10.5 million annually, 344 times the pay of typical American workers, but that was a steep drop in the ratio from 2000 when CEOs earned 525 times average pay. With companies forced to report their ratios, expect more pressure than ever from shareowners in 2011.

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DTCC Splits Chair and CEO Positions

The company that holds legal title to about 80% of all American stocks announced this week that it will separate the role of chairman and chief executive officer following a two-year review of the organization’s governance.

Splitting the roles will increase its oversight of risk management and follows a growing trend by international companies that have adopted this reform.

The CEO will oversee the DTCC’s overall business strategy and operations that relate to the daily running of the company and will report to the chairman.

But it says that DTCC’s risk management and compliance departments will report directly to the chairman to heighten independence, leading to a system of “checks and balances” between the business and control functions. (Global Financial Strategy)

DTCC’s depository provides custody and asset servicing for 3.6 million securities issues from the United States and 121 other countries and territories, valued at almost $34 trillion. DTCC’s subsidiary, The Depository Trust Company (DTC), established in 1973, was created to reduce costs and provide clearing and settlement efficiencies by immobilizing securities and making “book-entry” changes to ownership of the securities. In 2009, DTC settled transactions worth more than $299 trillion, and processed 299.5 million book-entry deliveries.

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