When will they ever learn?

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Expert Perspective by Grahall’s OmniMedia Editorial Board

expert perspective telescopeIt was sadly without much surprise that we read the February 1, 2009 article by Aaron Elstein in Investment News “Bank bosses get pay boost on the sly”.

The author writes: “Hoping to mute public outrage over huge Wall Street bonuses, the big banks are making a show of paying employees with more restricted stock, which can’t be touched for years, and less cash. Much less well-known is this: Many of the banks are paying dividends on those shares—even though the employees don’t actually own them yet.”

Elstein adds that: “…a review by Crain’s shows that 13 of the 15 best-paid CEOs in New York received them in 2008, the most recent year for which data are available.”  However, the examples he shares — with one notable exception of “AllianceBernstein’s CEO Peter Kraus who received $3.9 million — are what might be called piddling when compared to the total compensation these Wall Street tycoons (Blankfein, Chenault, Dimon, Pandit, etc) rake in. 

Correctly, Elstein points out that “To some critics, the payouts smack of a sneaky way to increase pay”. And to the pitchfork crowd, this apparent indulgence will be seen as one more offense to their sensibilities and one more crime against American taxpayers.

Elstein in fairness also points out that other companies (IBM, Pfizer and Morgan Stanley among them) have altered policies relating to dividend payments on restricted shares.

This practice is not new by any stretch; it has been around for as many years as the practice of providing restricted stock as a form of compensation.  In fact, we would even classify it as a predominant practice.  Although the fact that everybody is doing it and has been for quite some time does not make it either a thoughtful or a correct thing to do.   Dividends are essentially interest payments, and why would someone receive interest payments on property they don’t own?

It appears that most companies do not report these payments in the proxy disclosure compensation tables.  Frankly, we wouldn’t be surprised if compensation committees (and even the executives) don’t recall that dividends are being paid on these unearned shares… or they dismiss the amount because it is small and for most executives it is in effect no more than a “nuisance” payment.  And perhaps this is where the biggest problem lies.

Boards and executives should have figured out that the only way to avoid bad press and public outrage is to be upfront.  It has never been Grahall’s position that a certain form of legal compensation or perquisite is wrong in itself.  So although we don’t fully condone the practice of paying dividends on un-owned shares, we can’t vilify it either.

The issue is whether that component of compensation is the right one in the right amount for that executive and in that company.  Does that component of compensation in that amount send the right messages to the executive and encourage the behaviors that will move the business strategy along?

As the SEC gets more thorough (inspired by an angry public and livid legislators) they will continue to work to expose all components of executive compensation and all potential conflicts of interest in the creation of those rewards strategies.  Eventually, companies will need to “come clean” with EVERYTHING that executives receive and the way those compensation decisions were made.  

No question that the SEC needs to be more clear about disclosure requirements and have stronger enforcement procedures to make this happen, but if there is a wave of the future this is it.
Now is a perfect time to put your executive rewards strategy under the microscope.  To look at every component, protocol and decision making process, to know not just what decisions were made but why and how they support your business strategy.  Call us we can help you with this.

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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