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  • JACF Letting Go of Norm Hodak 122005

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    david3036
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    Competitive Compensation, Compensation Sonsultants, EVA, Value Based Management, Value-Aligned, Investing,

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    Competitive Compensation, Compensation Sonsultants, EVA, Value Based Management, Value-Aligned, Investing,

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    Attribution Non-Commercial (BY-NC)
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    20 просмотров10 страниц

    JACF Letting Go of Norm Hodak 122005

    Загружено:

    david3036
    Competitive Compensation, Compensation Sonsultants, EVA, Value Based Management, Value-Aligned, Investing,

    Авторское право:

    Attribution Non-Commercial (BY-NC)
    Скачайте в формате PDF или читайте онлайн в Scribd
    Отметить как неприемлемый контент
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    Letting Go of Norm: How Executive Compensation by Marc Hodak, Hodak Value Advisors* idespread criticism of CEO pay packages has spureed directors to engage more directly with ‘management and their advisors on compensa- tion issues, and 0 seek advice from investor groups and various experts in a search for "best practices.” ‘This new vigilance is transforming the process of execu- tive compensation design, administration, and oversight at many major public companies. Buc have all these process changes improved the output—that is, the compensation plans chemselves? ‘The effectiveness of most aspects of compensation plans is difficult ta verify by dizect observation. Confiet- ing opinions and counterexamples can be found for most of whacis claimed to be “best practice,” but until ecently there has been little empirical research 20 suppore or refute such claims. This paper explores some of the more concrete trends in executive compensation, evaluates those that lend themselves to tescable assertions of their value, and derives some conclusions based on an examination of ddecaled data on executive compensation plans for S&P 500 compenies. These conclusions also reflect my conver- sations with hundreds of executives and consultants, as well as my own research and experience advising dozens of firms." Unlike many critiques of compensation governance, this evaluation is not concerned wich the reasons that compensation structures look the way they do (such as “executive greed,” “board capture,” “market for ralent,” and so on), nor is it concerned wich the issue of high CEO pay per se. My principal focus here is how compensation scructures in their current form work for or against shaze- holder value creation, Against this standard, the evidence indicates that certain practices prove favorable, some have questionable value at best, and some are clearly counter- productive, A Process Guided by Conf Toward a Norm For people familiar with corporate governance, it will ‘come as litle surprise chac better compenszcion commit- tee practices may have little discernible eect on corporate Performance. Seasoned directors, senior partners of major consuleing firms, and experienced top executives all tend to agree that, although incentives can be a powerful motivator of behavior, specific compensation practices are very diff. cule to relate to specific company results. Company results are driven by a myriad of factors, many of which are largely beyond managements control. Therefore, any conclu- sions about the effects of incentive policies on corporate performance and value must be derived from large-scale, longeterm studies “The clearest trend one finds from 2 detailed study of compensation structures over the last ten years is the prevalence of the typical three-part plan among S&P 500 companies. These parts consist of: (1) an annual plan largely based on accounting or non-financial metrics; (Q)-a long-term plan based on accounting or scork-based performance: and (3) a separate program for awarding. non-performance-based equity grants. Long-term and equity grant plans have undergone some changes over the lase few years, mostly in the direction of restricted stock. instead of options, and toward an increase in performance- based equity grants. ‘One vrintended result of all the scrutiny provided by corporate governance critics on the compensation commit- see process is the homogenization of compensation plans across corporate America? As a senior Mercer consul- tant recently noted, compensation committees must now account for “optics” as a faccor in almost every decision. ‘What does “optics” mean? In practice, ie means that you want your plan to be invisible ro the outside world, attract ing Opinion ~The aor ahs to ek naan Aram eis eres ssc dee rg te SM 500 ashe of comoersatn aches Rapin Capa fo Dog ther et saecrng te aay, an Seat Olan oF FrcenntroaseCooes fo ‘eninge atl ns pe andr Nei ot {Mary otte reser tein or pret eat a ny uty generar esach so camperesten sets tei 2001 wih Shree Agnes) hy cospnsores by Stat tna Coan och Benson aa Roses

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