Did “Say on Pay” Dampen CEO Compensation?

While the report in the Financial Times, that Dodd Frank “say on pay” rules appear to be producing a reduction in 2010 pay versus 2009 levels, this change may well fall into the “one robin does not make a spring” category.

The FT notes:

According to pay consultancy ClearBridge, which has examined the first 100 Fortune 500 companies to file details of so-called proxy statements – resolutions to be voted on at annual meetings – there is clear evidence of a shift in pay practices….

Nearly 40 companies, including AT&T, Walt Disney and OfficeMax, have eliminated tax breaks that have seen them take on executive tax bills under some circumstances.

At the same time, General Electric has lengthened and toughened the terms of the share option plan for Jeff Immelt, its chief executive, responding to shareholder criticism ahead of Wednesday’s annual meeting.

A portion of the $7.4m option award that would have vested in 2013 was pushed back to 2015, and the entire award only vests if the company meets performance targets.

Companies are also reducing multiples of salary paid to chief executives as part of severance packages, and are adopting provisions to claw back bonus payments at a later date. Of the 79 companies disclosing clawbacks for executives, 34 adopted or enhanced these recently, according to ClearBridge.

There was one statement in the article that I question:

“Executive compensation tends to go up or stay flat, so any time it goes down is the beginning of a noteworthy trend,” said Russell Miller, partner at ClearBridge.

It’s premature to call this change a trend. In fact, it is far more likely that this is a one-time adjustment to eliminate the pay elements that are hardest to justify. Merely adjusting other forms of remuneration to recoup these reductions would be likely to attract bad PR. I’d expect top level pay to keep growing at a hard-to-justify rate from this new, slightly reduced base.

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