February 1, 2007

Senate Approves “The Small Business and Work Opportunity Act of 2007”

Today, the Senate overwhelmingly approved the “The Small Business and Work Opportunity Act of 2007,” in which I think Sections 226 deals with 409A and 226 deals with Section 162(m). It’s hard to parse this bill, which is S.349 if you plug it into this Bill Locator.

Yesterday’s WSJ included this negative opinion of the bill; I agree that Congress should not try to regulate executive compensation through the tax code as boards can evade the law with tax gross-ups and other employees may be unfairly penalized. Of course, Congress shouldn’t be blamed for excessive compensation as the op-ed intimates; that blame should fall on the shoulders of directors.

The Senate and the House now have to reconcile this Senate bill with a much simpler House version. Here are more documents related to the Act:

Staff Summary
Revised Joint Committee Summary
Revised Joint Commitee Revenue Estimate

Here We Go Again: Caremark’s Severance for Those Not Terminated

I easily could blog on executive compensation every day. I really don’t want to and I don’t think you want me to either. But it’s hard not to, particularly with boards continuing to prove that they are either aloof or indifferent as to what their shareholders want. Take Caremark as the latest example. As yesterday’s Washington Post column from Steve Pearlstein outlines (as well as this press release), many of Caremark’s executives will receive hefty change-of-control payments when CVS completes its acquisition of Caremark – even though those executives also will receive handsome employment agreements with the merged company! No pay practice infuriates shareholders more than this one.

A lawsuit related to this merger has been filed in Delaware’s Chancery Court, with Chancellor Chandler getting another whack at these types of egregious compensatory arrangements (you may recall that Chancellor Chandler is the one who sent the Disney case to trial). With boards like Caremark, I don’t blame Congress for “getting into the game” and trying to rein in existing practices, even though the end result will likely cause unintended consequences…

President Bush on Rethinking Pay Practices

And putting the nail in the coffin that CEO pay truly is a hot political topic, President Bush called on Wall Street to rethink pay practices in a speech yesterday. Here is an excerpt from today’s related NY Times article:

“White House officials said that Mr. Bush decided to raise the issue out of his own sense of outrage over deals in which executives have left flagging or failed companies with huge compensation packages, as workers and lower-level executives have been left far behind.

But officials said there was also an economic concern: that distrust of corporate executives over their pay had the potential to scare individual investors out of the market.”

Yes, Many CEOs of US Public Companies Really Are Overpaid…

This recent op-ed from the Washington Post is probably the most misguided one I have seen yet on executive pay. As I often do, I dutifully posted a comment with my views but what struck me the most was the outpouring of anger from others in the comment section. Executive pay likely will be an issue to contend with in upcoming elections, as reflected already in the recent Congressional activity in this area.

Harvard Law School has a new corporate governance blog and I will be posting some rants now and then on it. Below is a response to Professor Kaplan’s comments on the recent New York Times article about private equity funds:

While it’s true that some private equity funds are luring sitting CEOs with higher pay, I think it’s far from a widespread trend. There are about 14,000 sitting CEOs today; maybe a dozen have been lured away, if that.

And since the terms of the pay arrangements given to privately held CEOs are not publicly available, we don’t really know what those arrangements consist of. Will private owners continue to pay for poor corporate performance? Will they pay out a huge severance package–or any severance–to a fired CEO? I doubt that private owners would follow the lead of so many public companies in these criticized areas.

But more importantly, we must remember the difference between CEOs of private companies and public companies. Private owners are free to pay someone as much as they want; it’s their money. In the public company context, the board of directors have their fiduciary duties to consider when paying someone and appropriate processes must be used. Unfortunately, the processes followed today often are broken – and have been for some time.

In this “Open Letter to All Journalists,” I try to explain how board processes for setting CEO pay levels can be improved. For example, can you believe that boards didn’t consider the total amount already committed to be paid to a CEO before layering on more compensation as recently as three years ago? On, we coined the term “tally sheet” in 2004 when we started pushing boards to begin consulting spreadsheets before adding/changing an element of a CEO’s pay package.

I continue to get too many confidential emails from board advisors describing naive – and uninformed – acts by directors to buy into the notion that CEOs are underpaid. Many processes continue to be broken and even when the processes are repaired, boards have not yet addressed the excesses created by more than a decade of bad practices. This is all common sense: if we pay a highly paid CEO even more, will shareholders get better performance? I think the millions most CEOs already receive should be incentive enough.