INVESTMENT COMMUNITY PERSPECTIVE

Executive compensation has come under the microscope, and not because it is perceived to be too low. I am sure most everyone at your company, once the Information Circular is made public, does the same thing: looks to see how much the top executives make. People cannot help themselves, it’s like driving past a car accident – they look. Investors are the same, whether individuals or pension funds, they look. This must be a human trait.

Public companies mean public disclosure; everyone can see the information. Most executives make more than the people looking at the compensation information; that’s just the way it is. And when an executive’s compensation looks like a lottery winning to someone, noses can get out of joint. But are they out of joint because the pay is not commensurate with the job done, or is this just plain old ‘pay envy’? The perception of many is that the job of an executive is ‘easy’ and full of ‘perks’. Few see the long hours of work and the pressure to deliver economic returns, coupled with the responsibility of the jobs and safety of employees. Despite what many perceive, the job of a senior executive is complex and he or she is responsible for the strategic and tactical allocation of the company’s capital and resources, including its employees.

Pay Typically Independently Set, and Usually Complex

It is not likely that the President or executives set their own pay. Executive pay packages are typically structured with assistance from specialized consulting firms that gather information on pay from a wide variety of companies, including peers, and help put together a comprehensive compensation package. Consultants typically make a presentation to the compensation committee, which is usually made up of independent Board members, and an overall pay structure is generally created that has elements of current cash compensation and longer term incentive compensation. A balance must be struck, aligning compensation with the long-term well-being of the business. Various measures of performance are determined and targets set, with the goal of aligning the compensation with corporate performance. This may sound simple but it can be quite complex. And compensation is usually not all ‘stock price driven’, as that can put too much focus on near term stock promotion.

Think In Terms of Relative Scale

The average person on the street may think quite differently about executive compensation (say for bank executives, which is typically in the millions) compared to how an institution may regard compensation. The former may consider the compensation a lottery winning for a glorified teller, while the latter may think in terms of managing an extremely complex business where billions are at stake and years of experience are required to make strategic decisions that will impact the company for a very long time. A few million dollars well invested may mean billions in value creation down the road.

Think about Bill Gates or Steve Jobs. Did they create value for their shareholders? Although their overall compensation could be considered staggering, was it worthwhile from an investor perspective? Do you think replacing either man to pay less would have been wise? I have heard people say that nobody is worth paying a million dollars a year – and I beg to differ.

The Key Question

Is executive compensation aligned with the best interests of the corporation's stakeholders? This question is getting asked more and more and it goes beyond the shareholders and bondholders. The Board is considering the impact of corporate actions on employees and customers. It is examining whether the company is cooperating with all levels of government, abiding by all current and anticipated future laws. It is effectively measuring all aspects of the environment in which the company operates. Is management acting in a socially responsible manner for long-term corporate sustainability, while simultaneously maximizing corporate returns?

Bigger Companies Likely Have Generational Carryover Decisions

It dawned on me a while ago that in very large companies, senior executives will likely make important strategic decisions and never see the results. It is entirely likely that some of the benefits of previous management decisions are effectively bestowed on the next management team, and so on. These are generational bestowments. How does a Board structure compensation in such a situation?

 How do You Fit In?

As an investor relations officer, your job is to put your company’s best foot forward. Compensation is one topic best discussed privately rather than in a public forum; do not get dragged into public debate. It is also an area in which the IRO has no say. In fact, the senior executives themselves have little to no say. Keep private discussions brief; you are far better off gathering comments that you can summarize for the compensation committee, rather than arguing points. It may even make sense to tell an individual that you will pass along his or her comments to the compensation committee (and be sure you do). If discussions surrounding compensation are consistent and pervasive, there may be a problem that you cannot remedy. Passing this information to the appropriate Board members is the right approach.

You should be very well acquainted with the compensation program because there will always be questions; there are lots of acronyms to learn, terms to understand and computations to explain. Also, know who your peers are, how their compensation operates and if there are key differences. Often straightforward explanations will be sufficient.

Take Note: You are the Company's Eyes and Ears

Few people in any company face investors to the same degree as the IR department. It certainly makes a lot of sense to keep a diary of your discussions. This will put you in a much better position to spot trends and shifts in investor sentiment. These trends and shifts need to be shared within your company; ensure you have established a formal feedback process, and do not hold back – messengers are no longer shot. Remember that executive compensation is not an exact science and feedback can be very important to reshaping its structure so that, over time, the desires of executives in terms of compensation align with the needs of the company. Ultimately, overpaid executives are the result of a poorly structured compensation package.