Tech company CEO compensation raises ire

Executive compensation has been a hot-button issue for several years, and the final crop of fiscal year 2007 proxy statements filed in March and April did little to quell the cry for reform from industry watchdogs, activist shareholders, and the general public.

In the high-tech industry alone, dozens of CEOs came away with multimillion dollar compensation packages, pumped up by huge stock and option awards. 

[ Curious to see what other people in IT are earning? Check out InfoWorld‘s  Compensation Survey. ]

“Half of these companies had horrible years for their stockholders, yet the CEOs still walk away with sinful amounts of money,” voiced one Network World reader in response to our compilation of CEO compensation at 30 network-industry companies. “As an investor, I would like more accountability from the executives of publicly held firms. By accountability, I don’t just mean that they have to certify their financial reports. I mean they shouldn’t get a bonus unless they have improved the investors’ positions.”

Such comments echo complaints that have been voiced for years. “Executive compensation is under attack and has been for a number of years,” says Nora McCord, a consultant at Steven Hall & Partners, which specializes in executive compensation consulting.

The U.S. Securities and Exchange Commission (SEC) has tried to compel companies to be more transparent about how (and how much) their top executives are compensated, implementing new rules in the past few years around what must be reported.

For example, the SEC now requires companies to not only disclose that a performance-based award is tied to revenue but also to disclose the dollar amount of the revenue target.

This is one of the more controversial new SEC regulations, McCord says. “On the one hand, it’s better for shareholders to know how company resources are being spent and how executives are being incentivized. But on the other hand, you run into situations where a company might be giving guidance from an earnings management perspective.” Disclosing revenue targets also could conceivably put a company in a compromised position should it find itself the object of a takeover attempt, for example.

Still, most companies accept the idea of making CEOs and other top executives more accountable for their compensation, McCord says.

“What we see among our clients is an attempt to make the earn-outs harder, make the targets tougher,” she says. An executive might be required to not only hit the previous year’s target but also surpass it by some percentage in order to receive an award, for example. “We also see efforts to create greater accountability around the process.”

Some companies also are making moves to involve shareholders in the compensation process. The so-called “say on pay” approach lets stockholders vote for or against a company’s compensation formula. Most recently, shareholders of insurer Aflac , for example, approved the company’s pay-for-performance compensation policies and procedures. A full 93% of votes were cast in favor, with only 2.5% against, the company reported this week.

The say-on-pay approach is gaining traction, McCord says. “It’s not binding, generally, but it does give people an opportunity to weigh in.”

Meanwhile, a new study shows that top U.S. companies are relying more heavily on performance plans to tie executive pay to long-term company performance. For the first time, performance-based plans overtook stock options as the most popular form of long-term incentive compensation — a major milestone in the history of CEO pay, according to results from The Wall Street Journal/Hay Group CEO Compensation Study, released in April.

Use of performance plans (which tie the level of a CEO’s pay directly to how the company performs relative to predetermined metrics) grew 5% in 2007, while use of stock options and time-vested restricted stock declined 7% and 14%, respectively, consulting firm Hay Group reports.

“This significant shift has been a few years in the making, following accounting rule changes and corporate scandals like Enron and WorldCom, and more recently, new SEC disclosure rules and activist institutional shareholders,” said Irv Becker, head of the executive compensation practice at Hay Group, in a statement. “But 2007 marked a new era in the way CEOs are being paid.”

Looking ahead, industry watchers expect companies to be more vigilant about how they measure performance and hold executives accountable.

“It’s a continuum. It’s still not where some of the more activist shareholders would like it to be, but we’re moving in that direction,” McCord says. “The momentum is clearly on the side of more disclosure, greater transparency and a more rigorous approach to executive compensation in general.”

Network World is an InfoWorld affiliate.