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Pay Practices (pay + practice)
Selected AbstractsWill Executive Pay Globalise Along American Lines?CORPORATE GOVERNANCE, Issue 1 2003Brian R. Cheffins In the United States, the remuneration packages of top executives are characterised by a strong emphasis on pay,for,performance and by a highly lucrative "upside". There is much discussion of the possibility that executive pay practices will globalise in accordance with this pattern. This paper assesses whether such convergence is likely to occur. It does so by considering market,oriented dynamics that could constitute a "global compensation imperative". It also takes into account possible obstacles to the Americanisation of executive pay, such as legal regulation, "soft law" and "culture". The paper concludes with a brief series of normative observations. [source] Pay Without Performance: Overview of the IssuesJOURNAL OF APPLIED CORPORATE FINANCE, Issue 4 2005Lucian A. Bebchuk In their recent book, Pay Without Performance: The Unfulfilled Promise of Executive Compensation, the authors of this article provided a comprehensive critique of U.S. executive pay practices and the corporate governance processes that produce them, and then offered a number of proposals for improving both pay and governance. This article presents an overview of their analysis and proposals. The authors' analysis suggests that the pay-setting process in U.S. public companies has strayed far from the economist's model of "arm's-length contracting" between executives and boards in a competitive labor market. In place of this conventional model, which is standard in corporate law as well as economics, the authors argue that managerial power and influence play a major role in shaping executive pay, and in ways that end up imposing significant costs on investors and the economy. The main concern is not the levels of executive pay, but rather the distortion of incentives caused by compensation practices that fail to tie pay to performance and to limit executives' ability to sell their shares. Also troubling are "the correlation between power and pay, the systematic use of compensation practices that obscure the amount and performance insensitivity of pay, and the showering of gratuitous benefits on departing executives." To address these problems, the authors propose three kinds of changes: 1)increases in transparency, accomplished in part by new SEC rules requiring annual corporate disclosure that provides "the dollar value of all forms of compensation" (including "stealth compensation" in the form of pensions and other post-retirement benefits) and an analysis of the relationship between the past year's pay and performance, as well as more timely and informative disclosure of insider stock purchases and sales; 2)improvements in pay practices, including greater use of "indexed" stock and options to limit "windfalls," tougher limits on executives' freedom to sell shares, and greater use of "clawback" provisions in bonus plans that would force executives to return pay for performance that proves to be temporary; and 3)improvements in board accountability to shareholders, including limits on the use of staggered boards and granting shareholders the right to nominate directors and propose changes to governance arrangements in the corporate charter. [source] SIX CHALLENGES IN DESIGNING EQUITY-BASED PAYJOURNAL OF APPLIED CORPORATE FINANCE, Issue 3 2003Brian J. Hall The past two decades have seen a dramatic increase in the equitybased pay of U.S. corporate executives, an increase that has been driven almost entirely by the explosion of stock option grants. When properly designed, equity-based pay can raise corporate productivity and shareholder value by helping companies attract, motivate, and retain talented managers. But there are good reasons to question whether the current forms of U.S. equity pay are optimal. In many cases, substantial stock and option payoffs to top executives,particularly those who cashed out much of their holdings near the top of the market,appear to have come at the expense of their shareholders, generating considerable skepticism about not just executive pay practices, but the overall quality of U.S. corporate governance. At the same time, many companies that have experienced sharp stock price declines are now struggling with the problem of retaining employees holding lots of deep-underwater options. This article discusses the design of equity-based pay plans that aim to motivate sustainable, or long-run, value creation. As a first step, the author recommends the use of longer vesting periods and other requirements on executive stock and option holdings, both to limit managers' ability to "time" the market and to reduce their incentives to take shortsighted actions that increase near-term earnings at the expense of longer-term cash flow. Besides requiring "more permanent" holdings, the author also proposes a change in how stock options are issued. In place of popular "fixed value" plans that adjust the number of options awarded each year to reflect changes in the share price (and that effectively reward management for poor performance by granting more options when the price falls, and fewer when it rises), the author recommends the use of "fixed number" plans that avoid this unintended distortion of incentives. As the author also notes, there is considerable confusion about the real economic cost of options relative to stock. Part of the confusion stems, of course, from current GAAP accounting, which allows companies to report the issuance of at-the-money options as costless and so creates a bias against stock and other forms of compensation. But, coming on top of the "opportunity cost" of executive stock options to the company's shareholders, there is another, potentially significant cost of options (and, to a lesser extent, stock) that arises from the propensity of executives and employees to place a lower value on company stock and options than well-diversified outside investors. The author's conclusion is that grants of (slow-vesting) stock are likely to have at least three significant advantages over employee stock options: ,they are more highly valued by executives and employees (per dollar of cost to shareholders); ,they continue to provide reasonably strong ownership incentives and retention power, regardless of whether the stock price rises or falls, because they don't go underwater; and ,the value of such grants is much more transparent to stockholders, employees, and the press. [source] | ||||||||||