Archive for March 1st, 2010

Caveat Emptor Updated

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Expert Perspective by Grahall’s OmniMedia Editorial Board

Julie Connelly’s February 09, 2010 article in Corporate Board Member “Transparency Time for Compensation Consultants’ Own Compensation” really got our Editorial Board talking. 

Connelly says: “[The] Fury over excessive executive compensation is beating up on the pay consultants too.”  We agree, and found our conversation ranging from the criteria to select an executive comp consultant to whether comp consultants or their firms might find themselves as defendants in shareholder lawsuits over excessively risky behavior that might be seen to be encouraged by executive compensation programs.

The SEC’s new rules around disclosure have driven many public companies to avoid any suggestion of conflict by finding an independent compensation consultant, despite the fact that, as the article points out: “Doing other business for the company when you consult on executive compensation hasn’t been outlawed…  It just has to be disclosed.”

Most public companies do not want to raise any suspicion of conflict, and most multi-service firms do not want to have the fees their clients pay for services disclosed. (According to the Hewitt letter to the SEC  the argument against fee disclosure is something about it being “Proprietary pricing data [which] represents critical market intelligence [that] … competitors could use to potentially underbid us for existing and potential projects.” And, gosh, we guess Hewitt wouldn’t want to give their clients that kind of an advantage!)

At one time, hiring a multi-service firm for compensation advice was about the safest choice a Board could make.  It didn’t matter that the consultant often delivered the same cookie-cutter advice to every client. The mere presence of the multi-line was essentially considered a “seal of approval”, and the company could turn to shareholders and say: “We are doing it right”. 

Now a new age has dawned
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Keep on Strivin’

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Expert Perspective by Grahall’s OmniMedia Editorial board

In his article for GuruFocus.com “A Fix for Executive Compensation – The Reorientation of Director Intent” author, Karl (no last name) who “…is continually striving to learn more about investment”, says with regard to Director’s pay that:  “The directors are paid egregiously in many cases” – with the notable exception of Directors of Berkshire Hathaway. Karl continues: “Berkshire Hathaway board members were paid $2,700 or $6,700 for the year ended December 28, 2008 depending on their duties.” 

Karl suggests that “…director compensation to be stock only. And only stock that must be held for several years. Some sort of cap on this should be instituted. A maximum cash compensation should be extended to directors for expenses.” And he continues: “The proposed changes are not overly complicated or confusing.”

We agree with Karl in two regards:
1) He definitely needs to strive to learn more about investing and about the impact of director’s pay on shareholder value.
2) His proposed changes are not overly complicated; in fact, they are overly simplified.
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Investment Banks Cut Compensation Ratios

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At least seven of the biggest global investment banks reduced the pay they doled out to their employees last year relative to revenue, according to their financial results.HSBC Holdings PLC cut its investment-bank compensation-to-revenue ratio to 22%, from 36% in 2008; JPMorgan Chase & Co. cut its to 33% from 62%, and Royal Bank of Scotland Group PLC’s shrank to 27% from 76%.

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