CII Sounds Off on Executive Pay

Directorship Boardroom Intelligence

November 26, 2008
CII Sounds Off on Executive Pay

The Council of Institutional Investors released a statement voicing their discontent with the “perverse incentives that rewarded executives for driving up business with cant regard for the soundness and long-term benefit of those transactions.”

CII also noted that it strongly opposes companies that are compensating for lower executive pay by adjusting undervalued stock options, granting more stock or lowering targets for performance-based compensation.

“Investors across the board have taken a huge financial hit,” said Joe Dear, chair of the Council of Institutional Investors and executive director of the Washington State Investment Board. “At a time when the retirement assets of millions of ordinary Americans are becoming ever more skeletal, boards should not be fattening the pay packets of executives.”

CII believes that executive compensation is a critical and visible aspect of a company’s governance and pay decisions are one of the most effective decision shareholders can have a voice in. As companies continue to be bailed out by the U.S. government, taxpayers also are included in the mix.

CII has endorsed a set of best practices for executive pay policies and disclosures:

Companies should provide full disclosure of the performance goals used to determine annual and long-term incentive compensation. Such disclosure helps market participants evaluate whether pay practices encourage or mitigate against excessive risk-taking.

Executives should own a meaningful amount of the company’s common stock. A significant portion of their pay should be equity-based and they should be required to hold it for a period beyond their tenure.

Companies should provide shareowners an annual, advisory vote on the compensation of senior executives. Such a vote would give boards fast, useful feedback about investors’ views of the company’s compensation practices. It might also deter against over-the-top pay plans at underperforming companies.

Executives who leave a company as a result of poor performance—whether they are terminated, resign under pressure or the board fails to renew their contract—should not be entitled to severance payments.

Companies should have clawback provisions for recapturing unearned bonus and incentive payments to senior executives.
Compensation advisors and firms retained by the board should be independent of the client company, its executives and directors.

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