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.
"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.
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