Competitive pay crucial to keeping qualified executives

Business Roundtable offers guidelines on compensation
Tracy Carbasho

From the April 2, 2004 print edition of the Pittsburgh Business Times
Online version from BizJournals.com

Now that the smoke is starting to clear around scandal-ridden companies like Enron, corporations are focusing on executive benefits for the real reason they were intended -- to attract and retain qualified leaders.

"Compensation opportunities that are externally competitive and internally equitable are critical for the corporation to be able to attract and retain the key talent necessary to deliver acceptable returns to our stockholders,'' said William Eiler, media relations spokesman for National City Corp., which employs more than 1,400 individuals at all levels of seniority throughout the Pittsburgh area.

"National City maintains a diversified executive compensation package that consists of base pay, annual bonuses and long-term incentives.''

Mr. Eiler said base pay is the foundation of the compensation package for executives, while annual bonuses are delivered in response to individual, business unit and corporate financial achievements. Long-term incentive opportunities include both cash and equity-based awards.
"Cash-based opportunities are provided to those executives whose services are critical to National City's overall business results,'' he said.

"Equity-based awards in the form of stock options or restricted stock are used to link a significant portion of each executive's compensation to the value realized by stockholders. For a select group of executives, National City also maintains supplemental retirement plans that supplement the pension payments provided under the broad employee retirement plan.''

The highly publicized scandals at Enron, Tyco, Adelphia and Worldcom have resulted in widespread scrutiny of executive compensation packages throughout corporate America. In the wake of the upsets, a number of studies and subsequent advice has come out of top consulting firms, corporations and trade associations.
The Business Roundtable in Washington, D.C., issued a detailed report entitled "Executive Compensation: Principles and Commentary'' in November 2003. The Roundtable, regarded as an authoritative voice on matters impacting U.S. businesses, is an association comprised of chief executive officers from leading U.S. corporations that have a combined work force of more than 10 million employees.

The guidelines set forth by the Roundtable are getting a lot of attention and have been referred to by global human resources consulting firms, such as Aon Consulting, headquartered in Chicago. Aon calls the guidelines "an excellent place to start for every publicly traded company.''

Although executive compensation programs will vary among corporations based on their size, culture and competitive challenges, the Roundtable members have concluded that every publicly owned corporation should adhere to two guiding principles.

First, the compensation program should be established and overseen by a committee consisting entirely of independent directors. Second, the program should reflect the "pay for performance'' concept where performance-based compensation is contingent upon achieving goals.

The Roundtable offers six principles of executive compensation:
• Compensation should be closely aligned with the long-term interests of stockholders, as well as corporate goals and strategies.
• Compensation of the CEO and other top executives should be determined by a compensation committee comprised of independent directors.
• The compensation committee should understand all aspects of the compensation package and should review the maximum payout under that package, including all benefits.
• Compensation committees should require executives to build and maintain significant continuing equity investment in the corporation.
• The compensation committee should have independent, experienced expertise available to provide advice on new executive compensation packages or significant changes in existing packages.
• Corporations should provide complete, accurate and timely disclosure concerning all significant elements of compensation practices.

Lori Bello, executive director of the Pittsburgh Human Resources Association, Downtown, recently surveyed leaders from six local companies varying in size and type of industry. She said there have not been any significant changes in the way local corporations handle executive compensation.

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"There is essentially a status quo in Pittsburgh because there have not been any major changes other than a decrease in stock options and executives being asked to contribute more to their medical benefits,'' said Ms. Bello.

"These are national trends, though, so there is nothing atypical about what we're seeing in Pittsburgh.''
The change in medical benefits can be attributed directly to the double-digit increase in health care costs over the past few years, while the decrease in stock options is partially due to fears about another Enron situation. Ms. Bello also noted the impact of the Sarbanes-Oxley Act, the most drastic securities legislation since the 1930s, which focuses on corporate governance and accountability.

The purpose of Sarbanes-Oxley, enacted by Congress in July 2002, is to protect investors, provide oversight of the accounting industry and discourage corporate wrongdoing.

The legislation imposes stricter regulation on public companies by banning some executive compensation practices, including relocation loans and credit to purchase shares; requiring CEOs and chief financial officers to certify the company's Securities and Exchange Commission reports; increasing the criminal penalty for individuals who violate SEC laws; and setting standards for evaluating internal controls at companies, among other provisions.

"Companies in Pittsburgh are providing executive benefits that provide a competitive edge so they can recruit and retain a high-caliber work force,'' said Ms. Bello. "The playing field is becoming even more competitive, and bonuses and incentives are being used to attract talent. Companies are also looking at different ways to implement and measure performance.''

U.S. Steel Corp., which has about 10 top executives, offers a variety of awards and incentives based on performance. The senior executive officer annual incentive compensation plan for CEO Tom Usher and other designated officials, provides awards based on pre-established performance measures related to steel shipments, worker safety, work force diversity, environmental emissions improvements and common stock performance.

The bonus will only be awarded if performance reaches the minimum, or threshold level, for that measure.

MS. CARBASHO is a freelance writer.