Disclosure and executive compensation administration

by on June 30, 2009 · 1 Comment POSTED IN: HR Info Center

Accounting standards, federal law and shareholder activism have made executive compensation administration more transparent than ever

Disclosure trends in compensation administration are really looking at tying equity to performance. And we’ll talk about why all this is occurring and why you need to be thinking about these situations.

The new accounting issues in executive compensation administration
All the reasons we used options in the 90s are all the reasons why we don’t want to use them today. In the 80s and 90s, it was as if there’s no financial statement, P&L impact to issuing options. The executive can control the timing of that. The executive doesn’t have any investment in this until they want to pull the trigger — all those things.

What that did was it incented the executive team to take extraordinary risks to reward them for the upside because they had no downside risk. So that’s a big reason why boards are moving away from options in executive compensation administration as well not only because of the accounting issue but because of the risk and reward mismatch so to speak.

The FAS 123R that really came into play with compensation administration in 2004, 2005 asked companies to put the expense on their books. That’s caused them to look at it a little harder.

The benefits of transparency in executive compensation administration

Transparency leads to short-term decreases in compensation but long-term massive increases. Let me give you an example that’s near and dear to our hearts here in St. Louis. The 1968 St. Louis Baseball Cardinals were the first team with a million dollars in payroll. Okay, that was 1968, prefree-agency, pre all these other stuff. And of course, there was a lot of issues about that. These guys are paid high exorbitant amounts and all that kind of stuff.

What happened over time is we went to this free agency. We had total disclosure on stats. We have total disclosure in the contracts what people earned. That all became public. What happened was it was now very easy to compare Albert Pujols to Alex Rodriguez in their stats. You know, we know their homeruns. We know their slugging percentage. We know their RBIs. We know their batting average. And you can line them up. Compare them. And you could say, “Oh, okay. These two should be paid about the same.” And therefore, Albert Pujols’ compensation goes up.

If you look at those 1968 Cardinals to the Cardinal payroll today, it’s equated to a 14% compounded annual gross rate, okay? And so when you look at that, obviously, if people looked back and said, “Oh, if all these disclosures are going to lead to 14% annual increases, that wouldn’t be a good thing.” But that’s what happens. And it’s happened in the tax exempt world where we’ve had more disclosure on the 990. That compensation for those executives in that space has increased dramatically. And it’s going to happen with our public companies.

Comparison and measurement in executive compensation administration
Transparency helps us to compare. And in the past, when we hadoption amounts that were granted and that’s all – it was put into the proxy, we had what was termed the grant value or the number of shares that were issued. We had no way to compare the value of that grant among the companies.

Edited remarks from the Rapid Learning Institute webinar: “Executive Compensation Trends: New Benchmarks & Changing Regulations” by Edward Rataj and Kevin Nussbaum

1 Comment on This Post

  1. May 28, 2016 - 1:46 pm

    I think the percentage increase was good because in 1968 it already was a million dollars and the cardinals today must play much better and the sports wolrd has put a lot value to the United States

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