Scandal Fallout: Tougher Evaluation of CEO Pay

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As indictments and jury trials humble the reputations - and fortunes - of former WorldCom chief Bernard Ebbers and other once high-flying chief executives, a quiet change is taking place in CEO pay.

The scandals have done little to restrain hikes in executive salaries and bonuses. But corporate America seems to be adjusting by raising expectations for those paid handsomely - and not just expectations for the bottom line. Instead, corporate boards are redefining performance to include a host of factors from ethical behavior in the corner office to satisfaction of employees on the front lines.

Social performance, in other words, is starting to hit the business world's biggest wallets.

"One has to set not only financial goals, but also goals for how we're going to do our business and what kind of business we're going to do," says Pearl Meyer, a compensation consultant in New York. "We're giving people an opportunity to earn a stake in the business with good performance [in a range of areas]. I think you're going to get a better-run business over the long-term this way, rather than by hyping the price of a stock every day."

The idea: to shape leadership - and perhaps even mold moral character at the top - by customizing performance-based packages, experts say.

Five years ago, such nonfinancial considerations would have received no more than lip service, says Tom Wilson, an executive- pay strategist in Concord, Mass. "Now, nonfinancial measures are getting more people's attention because those are the leading indicators of financial performance. If your customers are satisfied, your employees are satisfied, and you're implementing different projects, you're going to produce financial results."

In his consulting firm's 2004 survey of 26 mid-size and large New England companies, 30 to 40 percent of performance-based bonuses had a link to nonfinancial factors, such as project results, customer satisfaction, or personal goals.

Performance-based bonuses made a splash in the 1990s as shareholders and directors aimed to rein in what were then skyrocketing market-driven packages. Since then, such incentives have been a mainstay of compensation packages, although critics charge that high-level compensation has continued to soar, especially through stock options.

But now, even stock packages come with additional strings attached. Instead of lavishing stock options on executives and lower- level employees alike, companies including Microsoft and Citigroup are cutting back on options as a perk of employment.

For chief executives, the trend is instead to award equity that is tied to company performance, says Diane Doubleday, a senior executive compensation consultant for Mercer Human Resource Consulting in San Francisco.

One example: to award restricted shares that vest only when the company reaches specified financial or operational goals.

"Eighteen months ago, I would have said, 'This is kind of cutting- edge. These companies that are moving in this direction are really market leaders,' " Ms. Doubleday says. "Eighteen months from now, the companies that aren't doing this are going to be really standing out as market laggards, if you will. So it's going to become the norm, and the companies that are not responding in some way to this are going to have to be explaining [why] to their shareholders."

On the surface, shareholders might find little reassurance in a trend that still enables chief executives to earn in many cases upwards of $10 million per year. In the last fiscal year, CEO bonuses alone jumped 28 percent to a median of $640,000, according to a sample of 233 companies analyzed by the Investor Responsibility Research Center in Washington, D.C. When stock options, restricted shares, and other sources are factored into the mix, median compensation packages approached $2. …