Risk vs. Executive Reward

Obama Seeks Better Controls, but Experts Split Over the Impact

By CARI TUNA and JOANN S. LUBLIN

Federal
officials hope to curb excessive executive compensation by controlling
the incentives for risk-taking built into pay packages. But experts
can't agree on how -- or whether -- pay plans encourage such risks.

Two recent reports highlight the challenge. In one, a critic of
executive compensation says financial institutions, in particular,
rewarded top brass for actions that put those companies in jeopardy --
and that the Obama administration's response could make things worse.
In another, a prominent compensation consultant says the pay practices
blamed for corporate excess had little to do with the financial crisis

"There's not an easy cause and effect relationship" between pay and
risk, says Don Delves, a Chicago compensation consultant. "We don't
know how to do it yet."

Nonetheless, federal officials want companies to try. Treasury
Secretary Timothy Geithner Wednesday recommended companies assess pay
packages to discourage "imprudent risk-taking." Soon after, Securities
and Exchange Commission Chairman Mary Schapiro said the agency is
considering requiring companies to disclose "how compensation impacts
risk-taking" in annual proxy statements. An SEC spokesman declined to
elaborate.

"Risk is the hottest emerging issue for compensation committees in
2009," says James D.C. Barrall, head of the global
executive-compensation and benefits practice at Latham & Watkins
LLP in Los Angeles, and an adviser to several board pay panels. Mr.
Barrall says he doesn't know of a major U.S. company that has
systematically analyzed the role of executive-pay practices in
encouraging risk-taking.

To complicate matters, boards must guard against making executives
too conservative, says Linda Rappaport, head of the global executive
compensation and employee benefits practice at Shearman & Sterling
LLP in New York. "Appropriate risk-taking is still something you want
to do in business," she says.

The
Treasury requires companies that received funds from the $700 billion
Troubled Asset Relief Program to evaluate pay plans for risk. That's
produced uneven results, to judge from recently filed proxy statements.

Citigroup
Inc. included a lengthy three-part analysis of possible links between
risk and pay by the bank's chief risk officer. Among other things, the
risk officer assessed whether other senior executives take "appropriate
steps to mitigate risks."

But Bank of America
Corp. offered a shorter statement, saying its compensation panel had
made "reasonable efforts" to make sure pay packages don't encourage top
officers "to take unnecessary and excessive risks that threaten the
value of our company."

Kevin Murphy, a finance professor at the University of Southern
California's Marshall School of Business, says it is possible to
control how much risk is built into pay packages. He said compensation
fell sharply for CEOs of banks receiving federal bailout money last
year, compared with those of other banks and non-financial companies.

Mr. Murphy says paying executives with cash bonuses, restricted
stock and stock options creates strong penalties for failure. He says
companies also can control risk by paying executives for longer-term,
rather than shorter-term results, and "clawing back" pay when big
losses wipe out prior profits.

Still, the recent papers highlight how difficult it may be to

<p>For more information on  <a href="http://online.wsj.com/article/SB124484447022511071.html" target="_blank">Risk Vs. Executive Reward</a>.</p>
<p>Posted by Dan Walter</p>
<p>Performensation:   <a href="http://www.performensation.com" target="_blank">Equity Compensation for High Performance Companies</a>.</p>