A House panel on Wednesday approved legislation written by majority Democrats to give shareholders at public companies a formal say in executive compensation packages. The proposal gives shareholders a chance to cast a nonbinding confidence or no-confidence vote on executive pay plans, allowing them to either ratify or disapprove of them. The move follows a challenge issued by President Bush earlier this year, saying that company managers and directors must step up to their responsibilities. Some are speculating, however, that the move could force more qualified executives out of the public sector and into the much more secretive and high-paying private world. Regardless, this is definitely a situation worth watching closely as it may significantly affect the corporate world in the coming years.

Bob Nardelli, former CEO of Home Depot (NYSE:HD), has been offered a new job at the private equity fund Cerberus Capital even after his questionable tenure at the Home Depot. While the CEO's reputation in the public sector may be forever tarnished, there are apparently many opportunities in the private equity world for experienced managers. Many private equity firms are looking for seasoned managers to run companies in their portfolios, seemingly regardless of their history. Bob Nardelli was ousted from Home Depot late last year after investors balked at his refusal to address their concerns about underperformance, extensive golden parachute and compensation while investors were losing millions, and his inability to effectively deal with the press. Given the secrecy and deep pockets of private equity, perhaps this is where future high-calibur CEOs will be drawn, which will likely end up increasing the amounts that public companies will be forced to pay to keep talent onboard. An interesting development, indeed...

The Financial Accounting Standards Board (FASB) has agreed to give the Securities and Exchange Commission (SEC) more say in the process governing appointments to the group, which sets accounting rules for thousands of public and private U.S. companies. The move was first outlined in a recent letter to SEC Chairman Christopher Cox but the SEC's role is not clearly spelled out. Many investors are hoping that the FASB will work towards reducing the number of arcane rules that are causing some U.S. companies to move offshore in order to save on costs. While the new arrangement with the SEC is far from perfect, investors now know who can be held accountable if positive changes aren't made. The main argument, however, is that changed appointments may raise the risk of political interferance; after all, it's not unheard of for Congress to muscle the FASB into making changes (read: options). Whether or not there will be problems remains to be seen; however, this is definitely an important development that investors should watch carefully.

The Supreme Court made it harder today for whistle-blowers to share in the proceeds from fraud lawsuits against government contractors. The False Claims Act enabled individuals acting on the government's behalf to file fraud lawsuits against companies that do business with the government. Upon favorable ruling, they would then receive a portion of what the contractor must pay the government. The problem occurs once allegations aer disclosed publicly since people could simply read a newspaper account or indictment then rush to the courthouse to file a suit. Now whistle-blowers must show that their information led the government to the fraud, although not necessarily that the claims ultimately proved to a jury must also have come from them. Overall, this case should not inhibit whistle-blowers, but rather prevent people from trying to take advantage of the situation.

General Motors (NYSE:GM) urged shareholders to reject all ten shareholder proposals for its June 5th annual meeting and to re-elect its current slate of directors. Interestingly, the shareholder proposals included things such as required disclosure of political donations, cut emissions of greenhouse gases and an easier process for smaller shareholders to elect directors. There is also an executive compensation proposal on the table, whereby 75% of all stock options and grants given to executives would have to be tied to a performance metric. The company did not comment on their reasoning behind their recommendations yet; however, they are due to explain themselves in their upcoming proxy filing in April. Meanwhile, many investors are questioning why companies are being so evasive when it comes to executive compensation and increased transparency - clearly, these measures are best for shareholders.

Gary Gerhardt, the former CFO of Engineered Support Systems, Inc., has been indicted on charges of participating in a scheme to backdate stock options between 1996 and 2002 according to federal prosecutors. The former CFO is being charged for 10 counts of fraud after he allegedly personally made $1.9 million in profits from the scheme. The man is the second former executive of the company to face charges, after Steven Landmann - the company's controller - plead guilty on March 16th.

Southwest Airlines (LUV) revealed that its chief executive received a compensation package valued at less than $1 million in 2006, even as the carrier posted its 34th straight year of profits amongst other struggling airlines. The company's SEC filings showed CEO Gary Kelly receiving only $967,021 last year. This amount consisted of a $416,860 base pay, a $462,000 bonus, $620 in above-market deferred compensation, and $96,541 in other compensation including 410k contributions, medical insurance, and profit sharing. The three year contract under which Kelly is working allows for a below-average salary with a greater number of stock options. Moreover, the CEO's bonus was only 20 percent larger than in 2005, while the company's profits were up 38%. Southwest's employees were also compensated at levels designed to promote consistent profitability and stability of workers, according to the company's filings. Clearly this is a model for other airlines who have been experiencing problems with profitability and executive compensation.

Northwest Airlines Corp (NWACQ) flight attendants objected Monday to the company's failure to disclose how much its executives and directors would be paid when the company emerges from bankruptcy protection later this year. Northwest's latest filings detailed its reorganization plan but left out the part about executive compensation, which it plans to file at a later date. The flight attendants union argued in a bankruptcy court filing on Monday that it's impossible to evaluate the reoganization plan without knowing how much executives and irectors would be paid and how they would be selected. They argued that cuts imposed on them came with the understanding that management would sacrifice too - which remains to be seen...

Delta Air Lines announced a new pay package on Tuesday that would grant $480 million in employee pay and benefits while putting the CEOs pay and benefits on hold as the carrier plans to emerge from bankruptcy late next month. The new employee compensation plan calls for a cash lump sum payment of 8 percent of last year's salary, stock awards, incentive performance awards, profit sharing, pay raises of 4 percent, and 401k contributions. CEO Gerald Grinstein said, "We want to get them as fast as we can up to an industry average. [The executives'] basic salary part of their compensation is not going to go up until everyone else in the company is up to the industry average."

The plan has many employees satisfied while Grinstein commented that while the pay has been lousy for executives (comparitively), the rewards have been great with the greatest reward being the opportunity to work with employees to rebuild the company. And with the end of bankruptcy in sight, it could mean a nice payday for everyone involved!

Goldman Sachs Group Inc. (NYSE:GS) said Monday that it was named as a defendant in a shareholder lawsuit challenging the way the firm accounts for employee options. The plaintiffs contend that the company's proxy statement undervalues stock option awards while the company's senior management received excessive compensation. Specifically, the shareholders claim that the company issued excessive compensation (constituting corporate waste) due to the company not following the proper methodologies when calculating compensation. The lawsuit names the company's board of directors, executive officers, and members of its management as defendants seeking an injunction against the March 27th annual shareholders meeting and the voiding of any election of directors in the absence of an injunction. This is one of the first lawsuits of its kind since the new executive compensation rules took place, so it will be interesting to see if it goes anywhere or is simply dropped by the courts.

The new executive compensation disclosure rules are causing confusion among some investors who are finding executives with negative comensation amounts. Recently, Brookfield Homes Corp () CEO Ian Cockwell earned a negative $2.3 million according to a recent SEC filing by the company. In reality, Mr. Cockwell did not work for free in 2006, nor did he pay his employer with his personal funds. Rather, this negative number stems from a new method for measuring the value of deferred share units and stock options. The new rule states that companies must now disclose the value of these securities based on the same accounting standards used in financial statements; this values them at the end of the fiscal year instead of on the date they are granted. Moreover, companies are now only required to disclose the value of the portion of options that vesnted in any year rather than the value of the total amount granted.

Many investors say that the new disclosure is too complicated for the average investor to understand. However, many experts argue that it has always been this complicated, the complexity is just being realized now that the disclosures are a lot less vague. The key to accurately understanding these disclosures is to read through the entire CD&A section, not just the summary tables, as these can be highly misleading.

Citigroup's (NYSE:C) chairman and chief executive, Charles O. Price, took home $25.98 million in 2006 despite lackluster stock performance which fell short of many of its peers in 2006, according to the compensation committe of the companys' board. The executive's salary consisted of a $1 million base salary along with a $13.2 million cash bonus, an increase of about 13% over 2005. Many investors expressed concern that the compensation committee utilized too many vague and intangible metrics when computing pay while failing to include the most important - operating expense control. Meanwhile, Citigroup also reported that Gary Crittenden, its new CFO, would receive a pay package worth up to $10 million in 2007.

Track Citigroup's SEC Filings
Track Citigroup's Executive Compensation

Last week SEC Chairman Cox said during a speech that some explanations of executive compensation were excessively long and "overlawyered". Many lawyers, however, that have put in long hours writing these new required "compensation discussion and analysis" sections took offense. They counter that the SEC's stringent requirements make it essential for companies to put ALL compensation data out there, no matter how many pages. While this may complicate things for the average investor, lawyers see it as a necessity in order to avoid being sued by the SEC or the plaintiffs' bar is any minor detail is omitted. So, where is the middle ground? Well, that remains to be seen. For now, investors will just have to learn to forge through the occasional 30-60 page proxy containing executive compensation documentation in order to find what it is that they really want.

SEC Chairman Cox gave an address to the 2007 Corporate Counsel Institute yesterday in which is outlined future changes and commentary on current SEC regulations. In particular, he focused on changes to the executive compensation disclosure rules. One of the primary goals of the new regulations was to prevent the "boilerplate" disclosures that have previously been the norm, and instead replace them with genuinely useful information about executive compensation. Here's where he noticed the problems...

"We're seeing examples of overlawyering that are leading to 30- and 40-page long executive compensation sections in proxy statements. We’re seeing companies including columns in the summary compensation tables even when there's nothing to report in those columns. This kind of slavish adherence to boilerplate disclosure is what we're trying to stamp out," said SEC Chairman Cox. "So while we're giving people some grace in getting used to the new rules, the plain English part of executive compensation will be increasingly strictly enforced in the coming year."

He then summarized, "Before I leave the topic of executive compensation, let me offer a word about the new Compensation Discussion and Analysis section. This new opportunity for a company to detail the objectives of its compensation program is what good disclosure is all about — and it's where inside counsel can play a vital role. The narrative in the CD&A should provide a qualitative look at the company's executive compensation policies, and shed light on the quantitative tabular data. This is your chance to plainly tell the company's compensation story. I urge you to take the opportunity and make the most of it."

Northwest Airlines (OTC:NWACQ) faced some sharp criticism Wednesday from the head of the pilots union, Dave Stevens, blasted company executives for taking excessive compensation, while the airline's projected profitability was largely achieved through deep employee pay cuts. "The pilots gave concessions to save Northwest Airlines, not to enrich the Northwest executives," said Mr. Stevens. "Management used an overly pessimistic plan to extract concessions." But just how much did they receive? Well, we'll know for sure before the company exits Chapter 11, because they will be required to disclose its management compensation plan. Mr. Steenland, CEO, said in a recent interview that top executives will receive equity in the restructured airline, while Stevens said he has resisted his efforts to grant stock or options to "front-line" employees who run the day-to-day operations.

The new SEC compensation rules state that companies have to now be clearer with where their money is administered, even if it involves benefit packages for their CEO’s. In short, shareholders want to know what the executives are making and spending – even if it involves their golf outings.

As for shareholders, they have a right to know what the CEO’s are spending their benefit packages on. Such packages may include golf club memberships, life insurance benefits, automobile and parking allowances, personal security, Internet allowances, and personal trips with the use of the corporate jet. Shareholders do spend a pretty penny on the leaders of their shares and companies. For example, Starbucks shareholders spent $1.23 million on perks last year. Perks for overall top US corporations are covered by a few good hundred thousand dollars per executive per year.

As if this wasn't enough, many companies actually provide extra money or a "gross up" benefit to cover the taxes associated with the perks. The issue arises when the shareholders and general public are unhappy with how much CEO’s are receiving yearly in perks and bonuses. However, the board members are the ones in control of the financial outcome of the perks and benefits for their CEO’s – they are approving such benefit packages. Traditionally, Boards have just approved these benefits under the table, but now that they are more apparent in filings, they may face increased investor scrutiny.

Blockbuster Inc.'s (NYSE:BBI) CEO John Antioco is set to fight back after the company dramatically cut his bonus check by about $5 million, exercising what is known as "negative discretion". The company's Board of Directors awarded Antioco a $2.28 million bonus, which comes in addition to his salary and deferred compensation amounting to about $2.5 million. Interestingly, the bonus also came with a provision saying that if Antioco protests, he is supposed to get nothing. Typically, these fights between management and the Board of Directors take place behind closed doors; however, since Antioco complained, the company was required to set aside a $4.5 million contingency (under FASB accounting rules) which was then reported in the company's SEC filings.

Why was Antioco's bonus reduced in the first place? Well, the Board of Directors argues that the company's profits have fell 28% in the fourth quarter due to higher costs for the launch of its "Total Access" program to combine ints online and in-store rental programs. Moreover, the company continues to struggle against its main competitor Netflix, which has now delivered over a billion DVDs. The company has also had problems with the CEO in the past, after Carl Icahn accused him of blackmailing shareholders by trying to collect a $50 million severance package after being removed forcefully from the company's Board. However, this payout was avoided when Icahn and the Board brought Antioco back onboard later. Consequently, many people believe it is actually Icahn behind the cut, trying to further motivate the CEO to increase free cash flows and unlock shareholder value. But either way, many people are hoping that other companies will follow in their footsteps and not be afraid to enforce change.

Motorola Inc. (NYSE:MOT) shareholders are also proposing new measures at the company's next annual meeting aimed at giving them a say in executive compensation. The news comes after MOT revealed Friday that CEO Edward Zander received $11.9 million in total pay for 2006, which included a $350,999 bill for personal use of the company aircraft. The new proposal calls for Motorola to adopt a policy enabling shareholders to cast advisory-only votes on executive compensation. These votes, while advisory-only, would likely sway the Board of Directors in the event of overcompensation - since the Board is supposed to act on behalf of shareholders not management. Another proposal on the table is aimed at recouping "unearned management bonuses" that would return any bonuses or incentive payments given out to executives if it's later "reasonably determined" that certain performance targets weren't met. Combined, shareholders are hoping that these new proposals will enable them to keep a tighter leash on executive compensation.

Northrop Grumman (NYSE:NOC) shareholders may get a say on executive compensation after the SEC denied the company's request to block the proposal from this years proxy shortlist. The proposal was first submitted by the Service Employees International Union, who reasoned that shareholders need ways to provide input to corporate boards regarding executive pay packages. Northrop sought to exclude the SEIU proposal from its proxy, saying that they believed it would be confusing and misleading for shareholders. However, the SEC disagreed and the measure will now be up for vote. The so-called "say on pay" policy would give shareholders an "advisory-only" vote on executive compensation packages, which could end up influencing the Board of Directors - who are hired to act on behalf of shareholders. Many are hoping that this decision paves the way for similar proposals in other companies where executive compensation can get out of hand.

Berkshire Hathaway's (NYSE:BRK) Warren Buffet offered his views on executive compensation in his annual letter to shareholders. In the letter, he explains how Berkshire comes up with their compensation and expressed his disappointment with pay consultants who have allowed such excessive compensation to take over. Buffet insists that the solution to the problem would be for a few large institutional shareholders to team up and take on the problem by taking a fresh new prospective.

Here's what the Oracle of Omaha had to say:

Berkshire employs many different incentive arrangements, with their terms depending on such elements as the economic potential or capital intensity of a CEO’s business. Whatever the compensation arrangement, though, I try to keep it both simple and fair.

When we use incentives – and these can be large – they are always tied to the operating results for which a given CEO has authority. We issue no lottery tickets that carry payoffs unrelated to business performance. If a CEO bats .300, he gets paid for being a .300 hitter, even if circumstances outside of his
control cause Berkshire to perform poorly. And if he bats .150, he doesn’t get a payoff just because the successes of others have enabled Berkshire to prosper mightily. An example: We now own $61 billion of equities at Berkshire, whose value can easily rise or fall by 10% in a given year. Why in the world should the pay of our operating executives be affected by such $6 billion swings, however important the gain or loss may be for shareholders?

You’ve read loads about CEOs who have received astronomical compensation for mediocre results. Much less well-advertised is the fact that America’s CEOs also generally live the good life. Many, it should be emphasized, are exceptionally able, and almost all work far more than 40 hours a week. But they are usually treated like royalty in the process. (And we’re certainly going to keep it that way at Berkshire. Though Charlie still favors sackcloth and ashes, I prefer to be spoiled rotten. Berkshire owns The Pampered Chef; our wonderful office group has made me The Pampered Chief.)

CEO perks at one company are quickly copied elsewhere. “All the other kids have one” may seem a thought too juvenile to use as a rationale in the boardroom. But consultants employ precisely this argument, phrased more elegantly of course, when they make recommendations to comp committees. Irrational and excessive comp practices will not be materially changed by disclosure or by “independent” comp committee members. Indeed, I think it’s likely that the reason I was rejected for service on so many comp committees was that I was regarded as too independent. Compensation reform will only occur if the largest institutional shareholders – it would only take a few – demand a fresh look at the whole system. The consultants’ present drill of deftly selecting “peer” companies to compare with their clients will only perpetuate present excesses.

Rep. Barney Frank proposed additional legislation aimed at providing shareholders with additional powers when it comes to executive compensation. The Massachusetts Democrat's proposed bill would give shareholders a chance to cast a nonbinding confidence or no-confidence vote on executive pay plans, allowing them either to ratify or disapprove of them. Similar provisions are already present in Britain, Sweden, and Australia where pay packages are rarely voted down but rather kept pay in check through fear of shareholder retribution. While no Republicans have yet endorsed the representative's bill, the Democrat-controlled Congress could pass the provision as soon as April. Given recent shareholder concerns over executive compensation, it would not be surprising to see this bill passed quickly into law.