Avoiding Executive Compensation Calamity: Case Studies & a Tool

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.

Internal Environment
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?

External Environment
Will this information become public knowledge?

Stakeholders
What are shareholder expectations about your compensation programs, and how do they affect plan design?

The Questionary and the Case Studies are available to anyone in the community at large.  Enjoy!

Image: Creative Commons Photo "Question Mark" by Margaret Anne Clarke

Comments

[Diane Vavrasek]

Ann,

Thanks for highlighting the case study!

Diane

[working girl]

Great info, thanks! It seems like too many exec packages include these 'No matter what happens, even if we fire you for destroying our core business with a slew of poor decisions, or have only been with the company a month before we get acquired and you get laid off, you get set up for life,' kind of deals. I'm surprised it took a financial meltdown for people to catch on that these kind of incentives may send the wrong sort of message.

[Ann Bares]

Diane:

You're welcome - a great idea and nicely executed! Hope it brings good things your way!

WG:

It is kind of amazing, isn't it, that incentives and arrangements like these managed to pass muster in such prominent organizations. Ah, hindsight.

[Nancy Hess]

Ann, I always read your updates because I always get something out of them. I appreciate you getting this out to the community, it is a great resource.

Nancy Hess

[Ann Bares]

Nancy:

Thank you... and thanks, by extension, to Diane. It is a great resource!

[E James (Jim) Brennan]

Keep in mind that many of these golden parachute packages are not "incentives" or "rewards" for Great Things Done but simply bribes, kiss-off hush money or payoffs to continue to keep thy mouth shut lest you lose millions still invested in Company stock. Open the closet and release all the skeletons, stock crashes and you lose your childrens' legacy of infinite wealth. It's usually quite effective in keeping a bad situation from getting a lot worse.

[good term paper]

i easily get nice & updated information for research purposes... I'd definitely appreciate the work of the said blog owner... Thanks!