Exec Pay Needs 'Performance Trusts' - Barron's, 22 May 2010

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By DUDLEY KIMBALL and ROBERT MORGAN | MORE
ARTICLES BY AUTHOR(S)

A simple set of guidelines for executive compensation.

CORPORATIONS HAVE LONG GRAPPLED with
executive-compensation issues, with varying degrees of rigor and
success. The only consensus is that no ideal methodology exists. Most
authorities agree that financial results should play a key role. They
don't agree about how to do it.

Some tie incentive pay directly to pre-established benchmarks, such as
earnings per share or return on capital, or to growth in those
benchmarks. Others use indirect methods, such as stock options,
restricted stock and other equity-flavored programs.

There may never be complete agreement on how to structure executive
compensation, even as the public and Congress have taken an increasing
interest in pay, especially large Wall Street bonuses. Nevertheless, in
lieu of heavy-handed attempts to legislate "reasonable" pay, we suggest
the concept of "performance trusts" to achieve the dual goals of
adequately rewarding executives and protecting shareholders and the
public.

Recent years have been replete with government efforts to rein in
executive compensation. Way back in 1993, Congress expressed dismay
about executive pay, and so passed legislation denying tax deductions
for any amount above $1 million paid to each public company's five top
executives -- unless the excess pay was related to company performance.
In 2004, Congress passed legislation that limits the circumstances under
which deferred compensation can be paid. In 2006, the Securities and
Exchange Commission issued comprehensive new rules on executive- and
director-compensation disclosure; "and in 2008, Congress decided to tax
some deferred compensation as soon as an executive earns a vested right
to receive it rather than at the later time of payment."

The House of Representatives recently passed legislation, supported
by the Obama administration and now awaiting Senate action, that calls
for shareholders to have a "say on pay." (But only a say: Shareholder
votes would not be binding, just embarrassing.)

The global financial crisis added a hostile perception:
Performance-based compensation took too little account of risk. The
Federal Reserve has proposed guidance to control risk-taking by bank
executives. The Federal Deposit Insurance Corp. proposes taking
compensation-related risks into account in setting deposit-insurance
assessments. And the SEC has cut a broad swath, requiring public
companies to disclose details about any compensation program that is
"reasonably likely to have a mate