Wednesday, May 27, 2009

Changing trends in executive compensation

In Europe, shareholders have started rejecting the large executive compensation plans that have become so commonplace in the last decade or two. The Wall Street Journal reports:
Shell is the largest among a growing group of British companies whose shareholders have voted down compensation plans in advisory votes, including Royal Bank of Scotland Group, Bellway PLC and Provident Financial PLC.
In the U.S. however, shareholders are still very generous to executives. In comparing Europe to the U.S., the article states:

European investors are angry over bonuses that are relatively modest by U.S. standards. At Exxon Mobil Corp., the largest U.S. oil company, Chief Executive Rex Tillerson received a 2008 compensation package valued at $23.9 million, including $1.87 million in salary, a $4 million bonus and stock grants initially valued at $17.6 million, according to the company's latest proxy.

Shell Chief Executive Jeroen van der Veer was awarded 78,889 shares, worth about €1.3 million ($1.76 million at current prices), in addition to his salary, bonus and benefits of €5.7 million.

The enormous stock grants that executives have received have been blamed for creating the pressure and incentive behind many of the financial statement frauds. In many cases, executives can make millions if they can get their stock to move a few dollars. Beating analysts' expectations by reporting fraudulent financial performance is the means that some executives have used to drive their stock price up.

Warren Buffet has been outspoken about his view that executive compensation is broken. I've heard that Buffet actively works to eliminate incentive for fraud at his companies. In any case, he has long been a critic of current compensation arrangements.

Some proposals floating around should lessen the incentive to commit fraud. For example, a recent MarketWatch article lists proposals to eliminate annual equity awards and make executives wait until two years after retiring to cash in their stock options. It will be interesting to see how executive compensation packages change in the near future and whether the changes will reduce incentives to commit fraud.

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