James Reda, founder of James F. Reda & Associates, is a leading executive compensation expert. His firm just released a study of pay and performance metrics for senior executives at the 200 largest companies in the S&P 500 Index. The study is based on information submitted by corporations during the 2009 proxy season.
Of course, executive compensation has long been a hot button issue for corporate watchdogs. Investors often complain about compensation that appears excessive, especially compensation at the CEO level. This is a particularly serious problem when performance results are poor.
In addition to paying a salary, most large companies reward their top executives through short term and long term incentive plans. Short term plans are usually based on pre-determined fixed targets such as EPS or net income. Long term plans rely on relative performance measures such as total shareholder return relative to the average return for other companies in the same industry. The SEC requires corporations to disclose their compensation policies and performance targets for both short term and long term incentive performance measures.
Unfortunately, Reda concludes, "Reporting of performance metrics and related payouts has not improved at the largest companies in the U.S. In fact, the numbers have deteriorated over the last year." To a large extent, investors are not getting the information the SEC says corporations must give them. Reda says this is because companies believe that disclosing specific targets could result in competitive harm. They also do not want to be held to specific published targets. They would rather keep their performance goals flexible, adjusting them as they see fit.
When share prices are going up, stockholders do not get worked up about compensation issues. After all, they usually do not have a problem with the CEO and other executives making lots of money if they, too, are making good money. However, shareholders get very upset when the CEO rakes in millions of dollars of compensation when the company is reporting net losses and the share price is sinking. Pay for performance makes a lot of sense. However, as Reda's study shows, existing plans and practices leave a lot to be desired.