With much fanfare a year ago, companies began disclosing the pay and perks of their chief executive officers in much greater detail to comply with securities regulations. Critics who hope that more disclosure will slow the CEO pay train should consider history.
The last radical change in disclosures came in the early 1990s, and that included a tax change that limited the amount that companies could write off as an expense on their income taxes, according to Tim Pollock, professor of management with the Smeal College of Business at Pennsylvania State University.
Download Compensation Leaders, part of the Executive Compensation Survey,from our Databank/Surveys section, Compensation Leaders: 2008.
If the idea was that providing more information was going to shame them into having more modest compensation, Pollock said, it didnt work.
Modern Healthcares sixth-annual report on corporate CEO pay, Compensation Leaders: 2008, bears that out. Eleven of the 30 CEOs covered in the report raked in $10 million or more in compensation in 2007, although those figures include proceeds from exercising stock options that were granted in prior years. Salaries for top-level healthcare executives rose by about 4% in 2007 compared with 2006, a figure that is consistent with previous years, according to Jim Nelson, executive vice president and compensation practice leader at Integrated Healthcare Strategies, Minneapolis. For executives who have held their positions for more than a year, the increases are between 4% and 5%.
The pressure that the strained economy has put on reimbursements and bottom lines seems to be affecting incentive payments, however, Nelson said. Incentive payouts, as a percentage of opportunities, have dropped from five years ago, Nelson said. Five years ago, the average incentive award was 100% to 106% of target. Last year, it was, on average, 92% of target. Actually, incentive awards overall have dropped.
The broader disclosures may help companies wring out perks such as personal use of corporate aircraft or even more egregious items such as paying the cost of providing an executive with fresh-cut flowers, for example, Pollock said. There is a danger, however, that looking at these itemswhich are low in value compared with salaries, bonuses and equity-based compensationmay obscure something a lot more significant.
The important thing is to look at how pay affects CEO decisionmaking, Pollock said. The goal is to encourage CEOs to take appropriate risks. Options do in fact do that, but the problem is that they strike out more than they hit home runs, Pollock said, citing research done by colleagues at Penn State. I personally think restricted stock is better than options. It gives them real skin in the game. Until an option is exercised, it isnt worth much. If its underwater, you havent lost anything, Pollock said. The restricted stock, if the value goes down, the executive has lost something.
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