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CEO pay debate spurs new industry group PDF Print E-mail
Monday, 02 June 2008


REUTERS, NEW YORK - With business leaders facing rising scrutiny from shareholders and lawmakers about their compensation, a new organization wants to tell corporate America's side of the executive pay story.

Leaders of the Center on Executive Compensation, an industry-backed group based in Washington, say they want to offer a reasoned view about how to create good pay practices.

The center says its mission is not to blindly defend CEO payouts that have angered investors, but to strengthen the links between pay and performance industrywide while ensuring companies remain competitive.

The media has "rightly" put the spotlight on instances of excessive CEO pay, "but our concern is that paints a picture of corporate America in total," said Richard Floersch, the center's chairman and chief human resources officer at McDonald's Corp (MCD.N: Quote, Profile, Research).

"For the vast majority of companies, they are dedicated to a very strong executive compensation program with very strong principles around pay for performance," he said. "Unfortunately, that story doesn't come out when you do have some of these outlier situations."

Activist investors have lashed out over executive payouts they consider too lavish, while members of Congress have publicly scolded some corporate chiefs for receiving outsized pay packages at a time when their companies have been hard hit by the U.S. mortgage crisis.

GRILLED

In March, two ex-Wall Street CEOs, Merrill Lynch & Co Inc's (MER.N: Quote, Profile, Research) Stanley O'Neal and Citigroup's (C.N: Quote, Profile, Research) Charles Prince, as well as Countrywide Financial Corp (CFC.N: Quote, Profile, Research) CEO Angelo Mozilo, got grilled about their pay by a U.S. congressional panel.

O'Neal, who stepped down amid big mortgage-related losses at Merrill, was not awarded any severance or exit pay but left with $161.5 million in previously earned awards. Prince also departed in the wake of mortgage losses at Citigroup, leaving with $39.5 million in stock, options, bonus and perks.

Mozilo, long criticized for his pay, realized $121.5 million from exercising stock options and was awarded $22.1 million of compensation in 2007, a year when the mortgage lender was hurt badly by the U.S. housing slump.

CEOs themselves play no direct role at the new center, an offshoot of the HR Policy Association, which represents human resources officers at big U.S. companies.

The center has a 16-member advisory board made up of chief HR officials at companies such as American Airlines (AMR.N: Quote, Profile, Research), International Business Machines (IBM.N: Quote, Profile, Research) and Lockheed Martin Corp (LMT.N: Quote, Profile, Research).

Shareholder rights activists say they do not have high hopes that the executive compensation center will advocate for investors.

"This is part of the effort of the business community to protect the status quo from angry shareholders and a concerned Congress," said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees (AFSCME), a frequent critic of executive pay plans.

"It just shows that the business community is mobilizing, rather than reforming pay," he said.

The center was formed at a time when union pension funds and other activist investors have proposed pay reforms, such as measures to give shareholders nonbinding votes on top managers' pay plans. These measures won majority votes at annual meetings of some companies this year, such as at Motorola Inc (MOT.N: Quote, Profile, Research), but have failed to pass elsewhere, including at Citigroup.

"COOKIE-CUTTER PAY PLANS"

The executive compensation center opposes the "say-on-pay" investor proposals and a bill pending in Congress calling for a mandatory shareholder vote on executive pay, saying they could end up forcing companies to adopt "cookie-cutter" pay plans aimed at winning shareholder support rather than be in the corporations' best strategic interests.

"There are a lot of unintended consequences and negative consequences from adopting a shareholder vote," said Charles Tharp, the center's executive vice president for policy.

The center may have a tough time explaining its positions to average Americans, particularly when studies show executive pay is rising much faster than pay for rank-and-file workers. Many Americans also are struggling with rising gas and food prices and falling home values.

CEOs of big U.S. companies averaged $10.8 million in total compensation in 2006, more than 364 times the pay of the average U.S. worker, according to United For a Fair Economy, a group focused on economic justice issues.

Leaders of new center say these type of comparisons are unhelpful when debating how CEO pay should be set. They say it's not instructive to compare the pay of people who work in different labor markets when calculating what a top executive should be paid, and that the debate should instead focus on issues such as what methodologies should be used to measure an executive's job performance.

Among the center's planned projects is a report on the views on executive pay among large institutional investors who often are not heard from publicly on pay matters, said Timothy Bartl, the center's general counsel.

The center also hopes to bring the growing body of academic research on compensation to the corporate world to help better formulate pay plans.

The center's leaders say that what has been lost in the heated debate on CEO pay is that compensation -- when properly designed -- can benefit a company and its stockholders.

"When it's strong, we know how it can help drive business success," Floersch said.
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