Governance Reforms Fail to Rein in US Executive Pay

Financial News, January 25, 2004 | Go to article overview

Governance Reforms Fail to Rein in US Executive Pay


Byline: Kit Bingham

US corporate governance has been overhauled in the past two years, but executive pay has escaped virtually unscathed.Chief executives' contracts in the US are typically of a generosity and security that would be unacceptable in Europe. The issue came under the spotlight with the recent acquisition by JP Morgan Chase of Bank One, and the naming of Jamie Dimon as the chief executive-in-waiting of the combined group.

As revealed by Financial News last week, Dimon's Bank One contract ensured that he does not need a bonus from the JP Morgan Chase deal to make money. Dimon's package was for five years and guaranteed a bonus, an annual grant of either shares or options worth $7m ([euro]5.6m) plus a two-year pension contribution for each year of service.

The contract was ring-fenced so that it would pay out in full in the event of a change of control.

It is an eye-popping deal by European standards. Ironically, in the US, Dimon is seen as a leader of good practice. Nell Minow, editor of the Corporate Library, the corporate governance research company, said: "He's one of the good guys. He's one of the few who borrowed money and bought stock." On joining Bank One in 2000, he invested $58m of his own money in the company.

Dimon's contract dates from 2000 before investors lost confidence in the US markets, thanks to Enron, WorldCom and Tyco. Since then, the Sarbanes-Oxley Act and revised listing rules from the principal stock exchanges have led to a shake-up of US governance. Compensation, however, remains the exception. "I would say that there's been no improvement whatsoever," said Minow.

Carol Bowie, head of corporate governance at the Investor Responsibility Research Centre, which advises institutional investors, said most large US companies continued to offer lucrative, multi-year rolling contacts. "I'm not aware of any change on that score," she said.

The US big business lobby has embraced many of the post-Enron governance reforms but only because they did not touch on pay, said Minow. "If they had tried to put compensation in the Sarbanes-Oxley Act, it would not have been passed," she said. Bowie added: "The reforms have really not touched executive pay."

Research carried out in 1999 by Minow showed that most chief executive contracts were written so the holder would be entitled to a full termination package, no matter how badly he or she had performed. At ToysRUs, the contract ensured that the chief executive could not be dismissed for cause unless convicted of a felony involving "moral turpitude". Minow said: "Apparently garden-variety felonies do not qualify."

Another contract required the company's board to accept the chief executive's assurances that he had acted in good faith, unless proven to the contrary by no less an authority than the US Supreme Court. …

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Governance Reforms Fail to Rein in US Executive Pay
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