Awhile back, WorldatWork created an Executive Rewards Questionary, a dictionary of more than 200 questions designed to help any interested party - be they Board member, HR practitioner, investor or journalist - think through the complex choices and implications involved in executive compensation design. Questionary questions have been organized into four main categories: Internal Environment, Stakeholders, External Environment and Disclosure and Transparency.
Recently, a graduate student (Diane Vavrasek), funded by a grant from WorldatWork, took on the project of applying some of these questions retrospectively to some of the highest profile executive compensation debacles of recent times, from Enron and WorldCom to the Home Depot and the New York Stock Exchange. The result, Case Studies in Optimizing Executive Compensation Design, is an interesting look back at the questions we all wish someone had raised early one in these high profile and ultimately embarrassing situations.
An excerpt from one of the case studies, this one on Fannie Mae:
In late 2004, both the CEO and CFO stepped down after the company restated earnings by roughly $10 billion due to accounting irregularities. The departures were publicly referred to as “retirements.” The CEO and CFO received the same severance and retirement packages they would have had they left with unflawed performance records.
The executive compensation program approved by the board included a special option program that granted options to executives that immediately vested once an earnings-per-share goal was met.
The board also gave the freedom to executives to sell vested options and shares at any time, allowing the CFO to collect on the sale of his shares despite the restatement of earnings.
How does expected performance relate to the current business outlook?
What are the results that need to be achieved in the short and long term?
Is the legal department comfortable with this design in the current legal/regulatory environment?
Will this information become public knowledge?
What are shareholder expectations about your compensation programs, and how do they affect plan design?
Image: Creative Commons Photo "Question Mark" by Margaret Anne Clarke