A group of Verizon Communications investors will be the first to test a dramatically different approach to evaluating executive compensation. The telecommunications company was selected by the group of investors due to its discount to its peers, excessive executive compensation and large bet on a future project - FiOS. The company's shareholders have created a forum through which they can discuss the prospects of the capital-intensive project as well as ways in which management can be incentivized to make it work. In fact, one of the primary objectives of the forum is to get investors thinking about management's stake in the success of FiOS and getting them to ask questions if it is not the case. The company is currently evaluating whether or not to particpate in the forum sponsored by ShareholderForum.com. Regardless, this is certainly an interesting development to follow...

The main question facing everyone involved with executive compensation is simply: How much is enough? The often large sums of money that executives receive have outraged many investors and columnists, but in a free market economy the best go to the highest bidder and the same thing goes for CEOs. No company wants to pay its CEO below that ever-increasing median either lest they face losing their leader. So, how does one remedy this situation?

Well, The Blue Ribbon Commission on the Governance of Executive Compensation in Canada conducted a study on the matter and came up with a very simple solution. The committee suggested that at the heart of all the controversy is the simply matter that most investors are just not aware of where these figures are being derived. Consequently, they believe that the single most important thing that companies can do is simply justify the compensation amounts in regulatory disclosures. This means not only disclosing all those members who had a say in the compensation amounts, but also disclosing exactly what performance measures pay figures are tied to and why. By explaining these figures in plain english, the commission believes that many problems can be avoided.

There were clearly problems over at Yahoo as more than one third of shareholders voted against the re-election of one or more directors, reflecting views of excessive executive compensation and poor performance under CEO Terry Semel. While all the incumbant directors were re-elected, the move was one of the largest no-votes of the year and sent a clear message to management. Interestingly, shareholders also rejected by 2-1 a proposal that would have allowed them to have a non-binding vote on executive compensation.

Yahoo's executive compensation problems stemmed from Terry Semel's large bonus and retention pay amounting to 6.8 million stock options while the company's shares dropped 35%. The CEO's $107.5 million paycheck in 2006 also made him one of the highest paid executives of the year. Many other executives at the company also received what many called excess compensation. In the end, shareholders are hoping that the vote at this annual meeting sent a clear message to management to either improve the company's performance or reduce their pay.

A new study examining turnover among top executives found that corporate boards are three times more likely than a decade ago to pull the trigger on an underperforming chief executive officer. In fact, roughly a third of all CEOs who left their company last year were fired to forced to resign for performance related issues. Many analysts and investors are hoping that such high turnover rates will stay the norm, as shareholders are attempting to increase their powers through new SEC regulations.

The biggest problem is that many executives are now requesting large departure packages, even when they fail and are fired from the company. One recent study found that executives ousted from the 1,000 largest companies in 2006 received more than $1 billion in severence packages! Many analysts and investors are hoping that new SEC regulations forcing disclosure will help curb these excess expenditures while still forcing boards to react quickly to failing executives. This is a welcome change for shareholders who have been dealing with subpar leadership in the past...

The very tenants of capitalism suggest that most Americans desire to move up the corporate ladder, but that may no longer be entirely true after new SEC regulations go into effect. The new SEC regulations aimed at improving corporate transparency now require the top five (in terms of pay) officers in a company to disclose the details of their compensation. The rule has given a new meaning to the #6 guy, who stands to benefit from both high pay and a confidential pay check.

The #6 guy has become a somewhat coveted spot - you can make a lot of money without having to deal with shareholder and public scrutiny. And the spot has become even more valuable as executives are now forced to disclose not only their salaries and stock options, but also their perks. In some companies, these perks can be significant and cause shareholder concern. In fact, a secretive pay check is becoming such a valuable commodity that some CFOs and senior officers are beginning to disappear from the top five lists in some mid-cap companies. And investors can only assume more such efforts to conceal pay figures will arise in the future...

Many investors believe that executive compensation is getting out of hand, but what about the CEO's that perform exceptionally well? One of the best performing bosses is New Century Financial's Robert K. Cole. During his nine year tenure, he has provided an average annualized return of 25% for his shareholders with his six year annual return approaching 36% - indicating that this number had been trending up. And what was his six year compensation? A mere $1.6 million, which pales in comparison to the large salaries we are seeing at many other companies like Apple and Wal-Mart. This below average pay and above average shareholder returns make Robert Cole one of the best performing CEOs in America.

Wal-Mart's (NYSE:WMT) problems be pushing down the company's stock at a rate of -3.4% annually but certainly not the compensation of it's top executive H. Lee Scott, which has topped $8.5 million per year. Scott is only the second CEO in Wal-Mart's history, with the first obviously being Sam Walton, and many are questioning whether or not he is the right one to lead the company. The world's largest retailer has underperformed the S&P500 for most of the decade while new initiatives such as expasions into Germany and the inclusion of higher end merchandise have failed miserably. Meanwhile, the company continues to receive a slew of angry letters from unions and lawyers looking to slow the company's rapid expansion outside of urban America and into smaller towns.

So, is Scott paid too much? Well, Wal-Mart continues to defend Scott's paycheck and his performance, pointing to the fact that last year alone sales increased $37 billion and income from continuing operations increased by $770 million. Moreover, the company claims Scott's compensation is benchmarked with the CEOs of other publicly traded U.S. retailers and large companies, adding that its boss gets paid one of the lowest salaries as a percentage of annual revenue and net income. Regardless, all of these improvements have done little for shareholder value, which is all that matters when all is said and done. Perhaps it's time for a change...

Democratic Presidential candidate and U.S. Senator Barack Obama sent a letter yesterday, May 30, to the leaders of the Senate Banking Committe requesting that his "Shareholder Vote on Executive Compensation Act" be given a hearing. Obama's proposed legislation would given shareholders of public companies a non-binding vote on executive compensation packages. Despite being only an advisory vote, advocates of the bill argue it would lead to increased transparency and awareness of CEO, and other executive, pay.

Here is the unabridged letter:


Dear Chairman Dodd and Ranking Member Shelby:

As you may know, in April, I introduced the Shareholder Vote on Executive Compensation Act of 2007 (S. 1181), which is the companion to a bill that passed the House of Representatives by a 269-134 vote.

Since introduction, Senators Harkin, Durbin, Brown, Kerry, and Levin have joined as cosponsors. The legislation was referred to your committee, and I am writing to respectfully request that you hold a hearing on the issue of executive compensation packages, and specifically, the Shareholder Vote on Executive Compensation Act.

S. 1181 would require a nonbinding shareholder vote on executive compensation packages. I believe public discussion and debate over executive compensation packages would force corporate boards to think twice before signing over millions of dollars to CEOs. Certainly, many CEOs are ably steering their firms and deserve their paychecks. But the rate at which executive pay has grown, as compared to stagnating wages among American workers, is rightfully frustrating shareholders and employees alike, especially given the lackluster performance of many of the companies paying these high salaries.

In 2005, the average CEO in the United States earned 262 times the pay of the average worker. Put another way, a CEO earned more in one workday than an average worker earned in a year. In 2005, the average CEO of a Standard & Poor’s 500 company received a 16% increase in CEO pay over 2004.

S.1181 neither caps nor limits CEO pay but merely requires that firms discuss and debate pay packages for CEOs on a case-by-case basis with their shareholders. If a board of directors disagrees with the nonbinding vote of shareholders, the board can still go forward with the pay package. But at the very least, shareholders would have had the opportunity to voice their opinions about whether the pay package is appropriate.

Thank you for your consideration and for your leadership in this area. I look forward to working with you on this and other legislation important to America’s economy.

Sincerely,

Barack Obama
United States Senator