Most people are now aware of the new laws aimed at curbing executive compensation by limiting the amount of money that can be put into their deferred compensation plan to $1 million (the rest incurring a 20% penalty). Democrats hail this as a final victory over a tax loophole that has allowed many executives to channel millions through a tax-free venue - which is true. The problem is that there are additional loopholes that these new regulations fail to address - loopholes that will be exploited by future executives. Consequently, these new regulations might end up hurting middle management and others while executives are free to get their money in other ways.

The main problem in corporate America is the power that most executives have over their own compensation. Ironically, in a market where shareholders are supposed to elect members of the Board to oversee management, CEO's serve as chairmans' of their own board in over 50% of all companies! This enables them to set their own pay in many cases, as management compensation is something that the board sets. Now, the problem lies in the fact that while these new regulations may limit the amount of money put into a deferred compensation account, they do not impose other limits on compensation. Therefore, executives can simply re-channel the money from these accounts to stock options, restricted stock grants, or a multitude of other venues. Meanwhile, middle management - who has very little control over their compensation - may end up paying more as a result.

Regulators made a similar mistake back in 1993, when they imposed a $1 million limit on tax-deductible CEO salary that wasn't tied to performance. This ended up being on of the major factors leading up to the explosion in the number of stock options granted to executives - a practice that was not as common before the regulations originally went into effect. In the end, the middle class ended up with a tax hike while executives ended up with more stock options. The laws we are seeing drafted today may turn out to be the same thing. Perhaps the old saying is true: history repeats itself.

President Bush addressed executive compensation in his "State of the Economy" speech today, delivered from New York City - the financial center of the world. President Bush reported that the economy has seen a faster-than-expected growth of 3.5% in the final quarter of last year. And while he did not go into any specific new laws that may go into effect, he did at least address the issue of executive compensation. He voiced his opinions on lavish salaries and bonuses for corporate executives, standing on Wall Street to issue a sharp warning for corporate boards to "step up to their responsibilities" and to tie compensation packages to performance. The president also recognized the continuing anxieties about the financial future, despite a string of reports that provide some reason for optimism. Finally, he noted that some workers are being left behind in the booming economy and that the disparity between the rich and the poor is growing, which is an issue that would need to be addressed.

A recent survey put out by PricewaterhouseCoopers and the Corporate Board Member magazine showed that directors still don't have as much control over corporate dealings that many believe is needed to curb super-sized compensation. The 1,300 directors polled indicated that one of the major problems is that in over half of the company's the CEO also served as chairman of the board. However, they also stated that they didn't want change; only 8 percent of the directors said that they would like more boardroom control while 59 percent said that they don't want the chairman position to be an independent director. Surprisingly, more directors were worried about the reprecussions associated with losing their CEO without a succession plan than they were awarding a CEO a $10 million bonus when their company's stock declined for the past two years. Another interesting statistic showed that less than half of those surveyed said their boards use tally sheets to add up total compensation, and about 20% directors said that they didn't know what the CEO would collect if they were terminated, retired or were subjected to a takeover. This lack of confidence and oversight in the boardroom is the reason for many of the problems surfacing with executive compensation. Perhaps this new wave of shareholder activism will help motivate change in a group of people that appears to be so resistant to it.

Executive compensation will be the focus of legislators again tomorrow as the Senate will vote on new tax legislation designed to impose higher taxes on executives, Wall Street banks, and other large companies. The move comes as the Democrat-controlled Congress continues to close loopholes and increase the costs of fraud in order to fund promised tax relief for the middle class and businesses. The new legislation, which will likely become law in a few months, could add up a collective $800 million tax bill for U.S. executives. The money will then be used to offset the costs of more than $8 billion in tax relief for small businesses hit by the upcoming rise in the minimum wage.

Specifically, the new legislation limits the amount of money that can be classified as "deferred compensation". While old laws allowed millions of dollars to be deferred (and therefore tax free), new legislation would limit this amount to just $1 million per year or the average of the previous five years salary (whichever is lower). Any amount above that would incur a hefty 20% penalty. The measures, however, were criticized by business organizations and executive pay consultants, who insist that they will encourage companies to pay higher salaries and bonuses to compensate for the higher taxes. Whether this is true or not remains to be seen; however, this is definitely a story to follow.

Applebees, Inc. (NDAQ:APPB) shares moved down $0.08, or 0.32%, to $24.74 today after Breeden Partners criticized the company's performance and governance and made several recommendations to the company's board of directors in a Schedule 13D/A filing with the SEC. The hedge fund began its letter by pointing out APPB's chronic under-performance compared to other company's in its peer group. They noted Applebee’s performance was 113.3% worse than Darden, 51.7% worse than the S&P 500, and 47.4% worse than the 75th percentile of the casual dining peer group. Next, Breeden pointed out the company's deteriorating fundamentals by showing declining same-store sales (5.2% to -1.0%), declining operating margins (16% to 12.4%), and declining return on capital invested (16% to 10%). The hedge fund noted that many of these problems stemmed from:

1. A fundamentally flawed growth strategy
2. Ineffective leadership during several years prior to Dave Goebel becoming CEO
3. Serious ongoing internal weaknesses in marketing and finance
4. Poor capital allocation policies
5. Excessive overhead costs
6. An ineffective board
7. Poor governance practices of various types
   
8. Inability to make timely decisions of consequence

The letter then moved into an area that is generating an increasing amount of press coverage - executive compensation. Breeden noted that even while the company has lost million in value over the past few years, executives were still granted over $30 million in bonuses! They also uncovered some other highly questionable executive perks, including personal use of corporate aircraft and even the use of shareholder funds to pay executives' personal income taxes. Perhaps the hedge fund said it best:

"We do not believe that shareholder interests are served by turning corporate aircraft into flying limousines for senior executives’ personal vacations. Just as importantly, this practice is inconsistent with the wholesome “neighborhood values” that Applebee’s claims to embody as a company. I am quite certain that most Applebee’s customers would be shocked to find out that a portion of the cost of their meal goes to fly the former CEO back and forth to his beach house aboard a corporate plane ... In addition to not requiring executives to pay any of the costs for their personal travel, the Committee has taken the extraordinary step of requiring shareholders to pay the income taxes owed by the CEO and other senior executives for their aerial vacation tours."

Clearly, there is a disconnect here between management and shareholders that the board is failing to correct. To address these issues, Breeden made several recommendations to the company's board of directors:

1. There should be a moratorium on any incentive compensation for any tier one executives so long as TSR remains negative. Similarly, incentive compensation should be zero if the company remains in the fourth quartile of relative performance in generating TSR.
2. A large proportion of incentive compensation (such as 50-75%) should be based on relative measures of performance compared to the company’s publicly traded casual dining competitors shown on page two of this letter.
3. Growth in average per restaurant royalty fees from franchise operations should be included as an incentive target for relevant executives (including the CEO and CFO), since franchisees represent 73% of the company’s system.
4. The level of free cash flow would be a healthy measure for some portion of incentive opportunities, especially for the CEO and CFO.
5. Minimum relative performance in generating TSR or EVA (such as being in the top 20%) should be a significant part of every executive’s target incentive eligibility. All executives should have a vital stake in the company outperforming its peers.
6. Personal use of corporate aircraft should be banned. Tax gross-up payments made during the last three years should be repaid to the company.
   

Combined, hopefully these changes will be implemented by the company's board of directors and management in order to protect the company's integrity and restore shareholder confidence in the company. The changes could also help the Applebees boost their performance and better motivate management to deliver shareholder value. Meanwhile, investors can track management's compensation and perks at ExecutiveDisclosure.com.

Executive compensation is clearly an issue that will dominate the 2007 proxy season for public companies. Today, a group of institutional investors - comprised of public pension funds, labor funds, asset managers, and foundations - announced a campaign to petition U.S. corporations to give corporate shareholders an advisory vote on executive compensation packages. The group, which was organized by American Federation of State, County and Municipal employees' (AFSCME) Employees Pension Plan and Walden Asset Management, said that it has filed shareholder resolutions at 44 public companies in the United States.

The group of investors are seeking an annual, non-binding advisory vote on the summary compensation table that every corporate board presents to investors in its yearly proxy statement. According to the group, these resolution were only submitted at companies where pay has been excessive or where there has been a misalignment between pay and performance over the past three to five years. Their target companies include the likes of Affiliated Computer Services, Citigroup, Coca-Cola, Exxon Mobil, Home Depot, Jones Apparel, Merck, Nabors, Pfizer, Qwest, Time Warner, UnitedHealth, and Wal-Mart.

The idea is good in theory, but will it work? The group is quick to note that similar resolutions were filed with a half-dozen other companies in 2006 and averaged more than 40 percent support in its first year, including 44 percent support at Sun Microsystems and Countrywide Financial, 43 percent support at Sara Lee, 41 percent at US Bancorp, and 40 percent at Home Depot. Moreover, the group points out that the strategy has already been successfully implemented overseas. The United Kingdom passed a law in 2002 requiring publicly traded companies to give shareholders an up-or-down advisory vote on executive pay, and the U.K. system has successfully restrained the growth rate of CEO compensation there ever since.

Whether or not this plan will work remains to be seen - the vast majority of shareholder resolutions will be voted upon this spring during 2007 stockholder meetings. Until then, investors wishing to learn more about executive compensation and how it relates to a company's performance can visit ExecutiveDisclosure.com, which includes free charts comparing compensation vs. performance, compensation vs. industry compensation, and much more!

Apple Computers (NDAQ:AAPL) co-founder and CEO Steve Jobs has found himself in the spotlight again after sources said he was being questioned by the U.S. Department of Justice and the Securities and Exchange Commission last Thursday. While reportedly "flanked by lawyers", very few details of the event have been released to the public. Steve Jobs was most recently put in the spotlight after reports surfaced that he was granted 7.5 million stock options that were backdated by two months. Apple subsequently confirmed that documents were falsified to create the impression that the options were approved at a board meeting that never took place. While no criminal chages have been filed, this ordeal may prove to be a blow for Apple's iconified CEO who has been a media darling for several years. With more than 200 companies already implicated in the growing options backdating scandal, this is definitely a story to watch closely.

Home Depot (NYSE:HD) shareholders suffered another setback today after their request to freeze Robert Nadelli's $210 million severance package was denied by a Georgia state judge. Moreover, since the court case delayed payment of compensation, the court also ordered that the payment process be sped up. The General Employees' Retirement System for Pontiac, Mich. first sought the injunction in early January after widespread anger over the ex-CEOs generous retirement package.

Meanwhile, Home Depot said that it has tightened its regulations by adding provisions enabling the company to recoup compensation paid to executives that commit fraud. The company also said that it has increased the number of directors on the compensation committee in order to increase scrutiny over executive pay. While many shareholders remain disgruntled over the situation, the company argued that it has learned from its mistakes and instituted measures to prevent future abuse. You can check out the compensation amounts of other Home Depot executives by visiting ExecutiveDisclosure.com.