http://www.dailyfinance.com/story/executive-compensation-still-high-but-change-is-happening/19374325/

From the White House to Wall Street to Every Street USA, who gets paid
how much is a topic of heated debate. Earlier this week came the announcement that
Wall Street employees saw their bonuses increase by 17% to a collective
$20.3 billion in 2009: During an economic downturn, a disparity in pay
like that gets extra attention.



The furor isn't likely to fade anytime soon. New Securities and
Exchange Commission disclosure rules kick in at the end of the month.
They require public companies to disclose risks arising from their
compensation policies and practices for both executives and
nonexecutive officers, to the extent these risks are reasonably likely
to have a material adverse effect.



The pressure is on. Corporations want to keep top performers happy;
boards are being taken to task by shareholders for their lack of
restraint on pay; and companies that were recipients of TARP money have
Obama pay czar Ken Feinberg waving a big stick. It's ugly out there in
pay-land.



Tying Bonuses to Long-Term Performance



RiskMetrics Group highlights some of the problematic pay practices:
multiyear guarantees for salary increases, nonperformance-based bonuses
and equity compensation; including additional years of unworked
services that result in significant additional benefits without
sufficient justification; including long-term equity awards in pension
calculations; perquisites for former and/or retired executives;
extraordinary relocation benefits (including home buyouts) for current
executives; change-in-control payments exceeding three times base
salary and target bonus; tax reimbursements related to executive
perquisites or other payments, such as personal use of corporate
aircraft and executive life insurance, among others.



Already, though, some change has come. Goldman Sachs reversed its
compensation structure after public outcry. "The higher-level
executives were given mostly stock compensation as opposed to cash, and
presumably this calmed some of the public outrage without necessarily
making Goldman Sachs less competitive at lower executive levels," says
Fred Lipman, co-author of Executive Compensation Best Practices, and a partner with the law firm of Blank Rome.



Some companies are now tying bonuses to longer-term performance. Shell
for example, had its pay voted down by shareholders. In reaction, the
company put in place an innovative program whereby bonuses are tied to
both share performance and other criteria, such as production and
cash-flow increases, says Michael McGrath, author of the new book Business Decisions! How to Be More Decisive While Reducing Risk in Today's Economy.
He says the new system at Shell doesn't necessarily reduced executive
bonuses, but it shifts some incentives toward a five-year horizon.



"If an executive accepts half his bonus in shares, they may be matched
in part or whole after three years, depending on how well Shell
performs compared to competitors such as Exxon and BP. The shares must
then be held two more years before they can be sold," says McGrath.



Reexamining the Whole Compensation Philosophy



Many organizations are responding to the political pressure to not pay
excessive bonuses by increasing base pay, says Ed Rataj, managing
director of compensation at CBIZ Human Capital Services. One financial
services company recently increased base pay by as much as 50% for some
employees as a way to keep compensation levels competitive in an
environment that would frown upon the payment of bonuses.



So how is the compensation landscape redefining itself? Todd
Gershkowitz, senior vice president of Farient Advisors, an executive
compensation consulting firm, describes what he sees. He says companies
are looking at several factors:

• Risk evaluation: Evaluating the relationship between compensation and excessive risk taking behavior;


• Transparency:
  Taking steps to restore shareholder trust through transparency,
  demonstrated reasonableness, and adherence to good governance
  guidelines;


• Alignment: Determining how to
  deliver demonstrable alignment between performance and pay, with a
  particular focus on the mix of pay, the choice of performance metrics,
  and the goal-setting process around those metrics;


• Incentives: Redesigning long-term incentive programs given shifting perceptions of the value of equity (stock options in particular), and;


• Communication: Engaging
  in more proactive, direct, open and two-way communication with
  shareholders about compensation philosophy and plan design.

There's also a movement toward instituting clawback policies that
require management to return compensation that's later found to have
been based on inaccurate financial results. Another emerging best
practice is the use of stock-retention policies, which require top
managers to maintain significant stock holdings until or through
retirement, which helps them maintain an alignment of interest with
shareholders, explains Laura Thatcher, leader of law firm Alston &
Bird's executive compensation practice.



Movement in the Right Direction



Peruse some corporate proxy materials, and you'll find evidence of real change. "The proxy materials for Boeing (BA) and American Express (AXP)
are two good examples of companies where they have completely revamped
their executive compensation system within the last two years," says
David Howard, counsel with the Business & Tax Group of law firm
Hoge Fenton Jones & Appel.



"They detail their new compensation formulas for their directors, CEO
and named executive officers," says Howard. "Bonuses are out. At-risk
compensation is in. There are short-term performance measures,
intermediate measures and long-term measures. They have compensation
plans that seem to be tied to performance. They require the top
executives to participate in the ownership and have their compensation
in excess of basic compensation be at-risk with meaningful performance
based standards. This is where most companies will want to be."



What's already becoming clear, says Rose Marie Orens, senior partner
with Compensation Advisory Partners, is that "performance-based
programs will be more prevalent after the last two-year hiatus."



Among the unexpected beneficiaries of all this compensation turmoil are
charities. "One of the interesting techniques out there right now is
offering additional compensation for the CEO's charity of choice.
That's a win-win for all," says Mitchell Rosenberg, an organizational
psychologist with consulting firm M.M. Rosenberg & Associates.



But do the steps being taken go far enough? Paul Sorbera, president of
Alliance Consulting, would argue that they could be going too far. "My
concern is that in putting pressure on these firms' pay policies, top
performers are at risk of being hired away by foreign firms. That's bad
business and bad politics."



However, in many quarters experts say all the changes are movement in
the right direction. Yet plenty of work remains to be done.



Transparency and Independence



"The compensation committee of the board needs to be made up of