Executive Compensation Counsel

High profile executives at CitiBank and Countrywide Financial Corporation have earned salaries, severance, or perks that investors and the media say are out of line with their company’s performance. Earlier this year, CitiBank officials increased perks when a $500,000 limit on salaries was imposed on the company as part of the federal stimulus money it received. Angelo Mozilo, former CEO of Countrywide Financial, received $115 million in severance pay when he left his troubled company, which was later purchased by Bank of America.

Add to that the government bailout money distributed as part of the Temporary Asset Relief Program to aid failing firms, and shareholder outrage has risen to a fever pitch.

But the times are changing. The Securities and Exchange Commission (SEC) charged Bank of America in August with misleading investors in regards to billion-dollar bonuses paid to Merrill Lynch & Company executives at the time of its acquisition of the firm. According to the SEC, Bank of America agreed to settle the charges and pay a penalty of $33 million.

Claims of outsized executive compensation packages have lead to legislators grilling executives about bonuses. In August, a U.S. House legislative panel voted for the so-called say-on-pay measures as part of the Shareholders Bill of Rights which allows shareholders of public companies to vote on the amount and kind of compensation top executives receive. The measures were introduced in July by U.S. Representative Barney Frank of Massachusetts.

Now, boards of directors, compensation committees, and corporate counsel find themselves in the eye of the executive compensation storm. Compensation experts in Minnesota say the state’s companies are avoiding the compensation kerfuffle by closely examining their policies and incrementally adjusting packages as needed.

Measuring Performance

Creating compensation packages that incent executives to create shareholder value and long-term sustainability for companies is more art than science. It’s difficult to set performance benchmarks when market volatility reigns, as it has during the last year.

Executive base salaries remain largely unchanged, however executive bonuses and perks are now being more closely linked to executive and company performance than ever before. The hot topic in compensation committee meetings these days is pay for performance. Companies have moved away from annual bonuses and toward rewarding long-term success, says Bob Rosenbaum, partner in charge in the Minneapolis law firm of Dorsey & Whitney.