Are you aware of which skills are prime in today’s CEO market? Do you know how your skills are measured? Which skillsets are most likely to garner bigger compensation packages?
Excerpt: …… we show that boards’ compensation decisions reward several reputational, career, and educational credentials of CEOs using a panel of S&P 1,500 firms between 1993 and 2005.
Our study is motivated by anecdotal accounts of executive search consultants, recent empirical evidence, and a growing theoretical literature that point to an increased importance of the labor market for CEOs over the last two decades. The central message of these studies is that there are fundamental differences in CEOs’ skill sets and that these differences are an increasingly important determinant of CEO pay. However, we still have scant direct evidence on whether differences in CEO skills matter for their pay. Even less is known about which CEO skills actually carry a premium in CEO pay and whether skill pay premia can help to explain key stylized facts of CEO pay, such as its dramatic rising trend and the increasing gap between the most and the least paid CEOs. In order to fill this gap, we use new hand-collected biographical data on a large sample of CEOs to examine whether there is a credentials premium in CEO pay—i.e., do firms make inferences about otherwise difficult to observe CEO skills from readily available facts that can be gathered from CEO resumes and professional career track records? If so, is the relation between CEO pay and credentials consistent with market-based theories?
Read full article via Which Skills Matter in the Market for CEOs? — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Small business of-interest and need-to-know. This study actually represents a study of the various studies on say on pay. However, the insights provided with this examination are of value.
Excerpt: In the paper, Ten Myths of “Say on Pay”, my co-authors (Allan McCall, Gaizka Ormazabal, and Brian Tayan) and I review many widely held misconceptions regarding the shareholder voting practice called “say on pay.” “Say on pay” is a prominent issue today, given its unique position at the intersection of executive compensation and shareholder democracy—two topics which themselves are of deep interest to investors, stakeholder, regulators, and the media. Despite this interest, several misconceptions have developed which continue to be commonly accepted. Fortunately, academics have devoted considerable effort studying “say on pay,” shareholder democracy, and executive compensation. As a result, a lengthy empirical record exists against which “say on pay” can be examined. Our intention is to review “say on pay” in light of the scientific evidence so that practitioners have a better understanding of the limits and consequences of granting shareholders the right to vote on executive compensation.
The ten myths of “say on pay” that we examine can be grouped into three general categories.
Read full article via Ten Myths of “Say on Pay” — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
More today on executive compensation — the what, why and how-to advice. Governance
Excerpt: The compensation landscape for 2012 and 2013 will include all of the above touchpoints. They will require most importantly compensation committees with courage and expertise, particularly if there are systemic problems or questionable linkages to performance and value creation for shareholders.
Read full article via Governance Gateway Blog » Aligning Pay to Value Creation and Performance.
Small business of-interest with some how-to included. Study reviews case history to arrive at a probable and suggested solution. Compensation
Excerpt: In the paper, Executive Superstars, Peer Groups and Over-Compensation — Cause, Effect and Solution, which was recently made publicly available on SSRN, we develop a pragmatic approach to understanding the run-up in CEO compensation over the past several decades. Rather than looking to markets or captured boards for the explanation, we argue that the actual mechanical process of peer benchmarking by which pay is set is the cause of the present controversy. From this perspective, we present what we believe will be an effective solution; additionally and collaterally, some interesting lessons about executive recruitment, particularly the CEO “superstar” culture, may be gleaned from our findings. We thank the Investor Responsibility Research Center Institute, which has long funded compensation research, for their financial support and helpful assistance in the development of this paper.
The piece makes a contribution to the executive compensation literature as it offers a novel explanation for the perpetual rise in CEO pay and suggests a significantly different solution to the compensation controversy.
Read full article via Executive Superstars, Peer Groups and Over-Compensation — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
This looks like it will be a good series on governance and how did we get here from there. For all leadership and managment
Excerpt: I’m going to offer some views on how multiple causes, all of them well-intentioned, came together to create a “broken culture,” and I suspect the lessons from the financial sector can be applied more widely. For me, it all seems to be a story of unintended consequences, which makes our current situation more of a tragedy than a conspiracy.
The factors that caused the decline in the financial sector, which I will further elaborate on throughout this series, include:
The rise of the “shareholder value” movement
Changes in the nature of finance sector
The impact of benchmarking approaches
The rise of stock based compensation plans
The rise of the “superstar” CEO
Why regulation on it’s own doesn’t work
Enterprises as educational institutions
How it all fits together
Read full article in series via The Rise of “Shareholder Value” and Its Unintended Consequences | Governance Center Blog.
Small business need-to-know say-on-pay (compensation). As you know, when there is a court finding and ruling, that result can have a like or major impact in all other instances across the country.
Excerpt: A recent opinion of the Delaware Chancery Court, Seinfeld v. Slager,  addresses the legal standard applicable to directors’ decisions about their own pay under Delaware law, an important topic as to which there is little prior law. In an opinion by Vice Chancellor Glasscock, the Court held that a derivative claim alleging that directors breached their fiduciary duties by granting themselves excessive compensation survived a motion to dismiss.  In so concluding, the Court also found that the directors’ action did not have the protection of the business judgment rule and was instead subject to “entire fairness” review.
The Court’s decision to require “entire fairness” review means that the claim of excessive compensation could proceed to a full evidentiary trial on the merits.
Read full article via Delaware Case Raises Question About Structuring Director Compensation — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Small business of-interest, update on 2012 proxy season hottest topic, say on pay. A look back at past months values.
Excerpt: Say on pay was a topic of paramount concern to issuers this year and was the basis for a great deal of work both before and during the proxy season. Looking back on the past few months, two primary themes emerge: First, the importance of understanding and responding to the methodology of ISS Proxy Advisory Services (ISS), as its recommendations continue to be highly significant; and second, the importance of direct, frequent communication with shareholders and investment decision makers.
Directors who make compensation decisions that result in a negative ISS recommendation, shareholder disapproval, or other public criticism will wish to consider taking steps to minimize controversy surrounding company compensation practices. And, while, in some cases, shareholders have sued boards on the basis of a negative say on pay vote, directors can be confident that their compensation decisions, when made in good faith and in accordance with their fiduciary duties, are protected by the business judgment rule.
Read full article via “Say on Pay” in the 2012 Proxy Season — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Small business need-to-know, of-interest and news-to-watch. How did we get to this point in CEO compensation packages and CEO sources — interesting information.
Excerpt: The dramatic and unprecedented increase in CEO pay in the 1980s and 1990s led to questioning the efficiency of CEO compensation packages. The debate concentrated first on the pay-performance sensitivity and then moved to the compensation level, given the observed widening gap between the pay level of executive officers and other employees. However, another important change regarding CEOs took place over the same period—their working experience prior to being appointed as a CEO. Increasingly, boards of directors have hired CEOs outside their firm.
In our paper, Internal vs. External CEO Choice and the Structure of Compensation Contracts, forthcoming in the Journal of Financial and Quantitative Analysis, we provide a rationale for the simultaneous increases in (i) CEO pay, (ii) use of equity in compensation schemes, and (iii) hiring of CEOs externally.
Read full article via Internal vs. External CEO Choice and the Structure of Compensation Contracts — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Small business news-to-watch and of-interest. UK proposal on say on pay. Discussion of current say on pay standing in US and UK.
Excerpt: The UK government has now gone one step further by proposing to reform the approval process for director remuneration, including through the introduction of a binding shareholder vote for all UK Companies that must occur not less frequently than every three years. The new UK proposal does not stem from guidelines or mandates adopted by any European or other supra-national body. Rather, the proposal was the initiative of the UK government made at the national level in consultation with companies, shareholders, institutional investors and other interested parties. The UK approach, if ultimately implemented as expected, could be a powerful example for US investors seeking to drive change in executive compensation practices.
We discuss below the current state of say-on-pay in the US and the UK reforms.
Read full article via Binding Shareholder Say-on-Pay Vote in UK — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Grant Thornton gives us 2 update bulletins on timely and hot topics in business today. Human resources and small business takeaways
Understanding shadow payroll
SEC adopts rules for compensation committee members and compensation advisers
Read two articles and access download via Grant Thornton LLP.
Small business need-to-know and news-to-watch. Compensation regulatory from a different perspective.
Excerpt: Today’s post addresses the increasing influence of institutional shareholders on executive pay. Prior posts have examined the role of proxy advisors in giving advice on how shareholders, especially institutional shareholders, should vote on say-on-pay under Dodd-Frank Section 951.  Today’s discussion focuses on the institutional shareholders themselves.
While institutional shareholders own a major portion of the share value of U.S. public corporations, the “ultimate owners” are, to a large extent, millions of individuals for whose benefit the equity in these corporations is being held by the institutional shareholders. (These individuals will be referred to in the post as “ultimate owners.”)
Read full article via Institutional Shareholders and Their “Oversight” of Executive Compensation — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Small business UK news-to-watch — proposed changes to compensation rules.
Excerpt: The impetus behind these measures is presumably the rising levels of executive compensation in the United Kingdom (according to recent press reports, the remuneration of FTSE 100 CEOs has quadrupled since 1998 from an average of £1 million to £4.2 million), and it appears that the Secretary was emboldened by the so-called “shareholder spring” targeting perceived excessive pay. Already, an unprecedented six companies – a number of them household names – have seen support levels of less than 50 percent in favor of their remuneration policies. Press reports indicate that failed votes have even led to executive departures.
While the U.K. government’s measures would certainly represent a significant departure from current practice, they are not as draconian as the March consultation paper might have suggested
Read full article via U.K. Announces Proposals Intended to Curb Executive Compensation — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Stanford has a tool for you to use to access a comparison of compensation packages — tool provides takeaways to help you to evaluate and set your small business standards.
Excerpt: Boards, shareholders, and journalists often look at a chief executive’s annual compensation plan to determine whether the company is offering the right incentives to increase shareholder value. Few consider another key question: how does the compensation that the CEO has already received over the years in the form of stock and stock options influence managerial decision making? This tool provides insight into that question by allowing you to plot changes in an executive’s wealth against changes in the company share price ranging from +100% to -100%. A manager who is rewarded predominantly in restricted stock or holds only stock will see a change in wealth that is essentially a straight line. If the manager holds a large number of stock options—especially out-of-the-money stock options—the payoff curve can become quite steep. Steep payoff structures provide strong financial incentive to perform but might encourage unintentional or excessive risk taking.Using the drop downs below, compare the payoff functions of up to 5 executives, among one or multiple firms.
See introduction and tool here via Compensation & Wealth Calculators | Stanford Graduate School of Business.
Small business need-to-know, update, of-interest — the summary of the final fules from SEC on Dodd-Frank.
Excerpt: On June 20, 2012, the U.S. Securities and Exchange Commission (the “SEC”) released its final rules (the “Final Rules”) implementing Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 952 of the Dodd-Frank Act (“Section 952”) added Section 10C to the Securities Exchange Act of 1934 (the “Exchange Act”) and contains a number of provisions generally relating to the independence of compensation committees and their advisers. The Final Rules are in most respects identical to the proposed rules released on March 30, 2011 (the “Proposed Rules”).  Below is a summary of the provisions of the Final Rules, noting the key changes from the Proposed Rules.
Read full article via Compensation Committees and Adviser Independence under Dodd-Frank — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Whee — sort of the business executive version of sharp-raps -on-the-knuckles-with-a-ruler (I know they don’t do that now — or — as a matter of fact, even in my school time, which was a long time ago — but that is the idea, right?) According to this article, it is successful? Would love to know what everyone thinks!!! Leadership and compensation
Excerpt: This paper, which studies large decreases in CEO compensation as a response to poor performance, argues that sharp pay cuts often serve as a substitute for outright dismissals, and that boards use extreme reductions in pay as a way to motivate underperforming managers. In fact, the researchers found that more than twice as many CEOs are subjected to sharp pay cuts as are forced out. The result is typically beneficial to both sides: Firm performance improves, and the CEOs remain at the helm with their compensation eventually restored.
Read full article via Prodding a CEO with a Deep Pay Cut. From Strategy + Business