Clearing a Path Through The Executive Comp Minefield

June 1, 2004 ( - Human resource (HR) departments today are uniquely challenged to help their firms - and themselves - avoid winding up in the headlines as a result of excessive executive compensation arrangements.

Regulators from all corners of the federal government bureaucracy have their eye on how companies are paying their executives and unfortunately, human resources executives are finding themselves on the front line as the ultimate corporate scapegoat, according to Brent Longnecker, President of the Houston-based consulting house Longnecker & Associates, in his presentation Weapons of Mass Excess: How to Avoid the Shock and Awe of Executive Pay.

Longnecker cautions that while New York Attorney General Eliot Spitzer’s recent pursuit of former New York Stock Exchange head Dick Grasso has garnered headlines across the country. However, what drifts to the bottom of most stories, according to Longnecker, is that Spitzer’s crusade against Grasso’s pay package did not stop with the former New York Stock Exchange (NYSE) Chairman – Spitzer also drew a bead on the consultant that drew up the pay plan…and the NYSE’s Vice President of HR. When Spitzer tackles the role of HR in this case, it will be waged at his “fiduciary responsibility as the VP of HR,” Longnecker said.

Speaking at WorldatWork’s 49 th Annual Conference, Longnecker said HR departments find themselves on the front lines trying to defuse potential Weapons of Mass Excess, or WMEs as they are referred to. Further, like a chess game, executive compensation has be thought out to what the future impact of any immediate move will have, so HR professionals need to open up the channels of communication between their departments and that of the executives to make sure what looks right for the now, will continue to be a good policy in the future.

Communication Lines

A major problem with the current environment is communication, since “most comp committees don’t have people who understand comp sitting on them,” Longnecker observes.

“It would be nice to have at least one comp committee member who, when you say FLSA, doesn’t think it is the F-word,” Longnecker adds wistfully, noting that the Vice President of HR needs to have the same kind of relationship with the corporate compensation committee that the Chief Executive Officer (CEO) has with the corporate audit committee.

Once HR has the compensation committee's attention, Longnecker provides a guide map for them to prevent a potential explosion of a WME. "If we don't defuse the weapons, they are going to cause all kinds of damage and paint really good people badly," says Longnecker, in areas such as stock options, inadequate governance, SERPS, severance provisions, and fringe benefits

With stock options, Longnecker says companies need to diversify option grants across a broad range of grants, such as restricted stock, performance units and NQDC. Additionally, Longnecker suggests considering semiannual grants, to prevent such a high prevalence of underwater stock options and giving competitive awards reviewed in context of total direct compensation.

Perhaps most importantly when companies structure severance provisions, and not just for executives in this case, is that particular care is used in tightly defining what justifies termination for "cause" and "good reason."

Guide Looks

"A Court is always going to rule for the executive if it is not tight," Longnecker answers simply. As a guide, he says reasonable severance provisions would provide a package under a change of control, death, disability, termination by the company without cause and termination for good reason.

Speaking about the advanced scrutiny currently focused on fringe benefits, Longnecker notes, "We can all thank Mr. Welch for this," he says, referencing the widely publicized divorce settlement of former General Electric chief Jack Welch. "This is one of those issues where someone asked do you think anyone will ever find out about this? Of course not, it will all come out after you retire, what could go wrong?"

Don't Assume

Rather than subject a firm to the same level of questioning about such policies, Longnecker says first, "Don't ever assume no one will find out." Second, HR needs to ask if a perk, such as use of the corporate jet in the case of Welch, will cause more problems than value. Longnecker says perks are all over the place, and while some of them might seem reasonable, some of them might appear ridiculous. In these cases, the perk needs to be viewed through the lens of an investor and the public perception of such a perk.

The mine sweep is not provided without a cautionary note however - any modifications made to any of these compensation vehicles need to be done aware of the "optics," a theme that permeated throughout Longnecker's presentation. In other words, companies need to be aware of how executive compensation plans are perceived by the public, and perhaps more importantly, by the shareholders.

"Optics is something you need to be talking to your comp committee about," says Longnecker.