Tuesday, January 15, 2013

Time Warp: Old Solutions for Old Problems

Fred Whittlesey
Compensation Venture Group, Inc.
Conscious Compensation®

With the new year upon us and "proxy season" on its way, we can expect to hear some familiar refrains about executive pay. Maybe something like this:

"...corporate profits rose 108 percent, and CEO pay rose 481 percent, but the average worker's pay rose just 28 percent (during the 8-year period), barely more than inflation..."

"...pushing the average large company CEO pay to 419 times more than the average manufacturing worker..."

"...it is inappropriate to compensate senior executives for improvement in company performance that are attributable to factors beyond their control."

Are these quotes imagined media coverage from Spring 2013?  Or a rehash of 2012 media coverage of executive pay?   Nope.

These are from an article on Social Funds - "the largest personal finance site devoted to socially responsible investing" - dated March 14, 2000. I was interviewed for that article and quoted several times.  Yes, I was promoting Conscious Compensation® ideas long before any of us had heard of Conscious Capitalism and were still under the rubric of "social responsibility."

In the article I extol the virtues of indexed stock options as a solution to the perceived, and in some cases actual, excessive pay delivered from ordinary stock options (see my Effective Equity blog for more technical treatments of topics like this).  It was a good solution then, as it would be now, except...

"...current accounting rules in the U.S., which are continuing to diverge from economic reality, reinforce the aversion to their use" said Whittlesey.

The accounting rules in place for equity-based compensation in 2000 discouraged the use of indexed stock options.  Subsequent changes in accounting rules in 2005 continue to provide such discouragement (FAS123R, now ASC Topic 718).  Changes to the tax rules (Section 409A) put another nail in the coffin of indexed stock options.

A key theme in my work in Conscious Compensation® is the continuing tyranny of the accounting and tax community - legislators, regulators, and practitioners - forcing companies to adopt compensation practices that optimize reported (accounting) and actual (taxation) financial outcomes and drive pay design in the opposite direction of conscious values and principles.

Fiscal years, tax years, quarterly earnings results, profit-based annual incentive programs, imaginary noncash expenses that bear no relationship to compensation actually paid - all of these concepts must be revisited by a company devoted to the idea of Conscious Capitalism and supporting that strategy through providing Conscious Compensation® to all employees, including executives.

As this old article shows, it's not a new problem and it doesn't require new solutions but does require a very different perspective regarding which stakeholders matter.  Not just shareholders, stakeholders - including all employees, including executives.  Those accounting and tax professionals are stakeholders, too.  We call them "suppliers" and every conscious company needs "collaborative, innovative suppliers." Even their compensation consultants.

1 comment:

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