Executive Pay

1
Executive Pay

• Lauren Brooks
• Ben Shea
• Melissa Martin
• David Mordini
• Ryan Gore

2
Introduction

• 80 of Americans agree most CEOs are paid too
  much.
• 1980 median exec. comp. 33 times that of an
  average worker.
• Today that number has grown to 104 times, with
  the top 10 making 350 times what the average
  worker makes

3
Threat to capitalism?

• ½ of American industry comp. systems are unfair.
• When CEO is overpaid, so are executives at next
  levels
• Higher turnover rates
• Execs are taking more and more for themselves
  while giving less and less to employees.

4
In the news

• Frank Raines, former CEO of Fannie Mae, collected
  90 mil while the company had overstated earnings
  by 11 billion.
• Phil Purcell, former Morgan Stanley CEO,
  collected over 60 million while the stocks
  value fell over 25 during his tenure.
• 50 companies are currently under investigation
  for SEC violations.

5
Current Regulations

• Section 162 of the IRS tax code
• Intended to tie top executive pay packages to a
  companys performance by limiting tax deductions.
• Butcompanies are finding ways to side step the
  rule.
• Companies deduct almost all of their top
  executives compensation.
• Performance-based metrics
• Cost to federal government in taxes
• Companies will pay

6
SECs New Executive Comp Disclosure Rules

• July 26, 2006 SEC voted to amend rules requiring
  disclosure of executive and director compensation
  
• Amendments intended to make proxy and information
  and report and registration statements easier to
  understand
• Goal is to improve the quality and usefulness of
  the information that shareholders and board of
  directors receive about executive compensation
• Provide more complete picture about the
  compensation of
• principal executive officer,
• principal financial officer
• highest paid executive officers and directors

7
New Disclosure Rules

• Improve Summary Compensation table
• Require all elements of compensation to be
  disclosed
• Total compensation figure
• Add Compensation and discussion analysis section
• narrative overview material factors underlying
  compensation policies and decisions reflected in
  tables

8
New Disclosure Rules

• Specific Information for following 3 Categories
• Detailed disclosure with respect to last fiscal
  year and two previous years
• Holdings of equity related interests that relate
  to compensation or potential sources of future
  gain
• Retirement and other post employment compensation
  (pension, deferred)
• Narrative description of any arrangement tied to
  post employment
• New rules will take effect for fiscal years
  beginning on or after Dec. 15, 2006

9
Background

• Tyco International Ltd.
• CEO Dennis Kozlowski (1992 to 2002)
• CFO Mark Swartz
• Stole 100s of millions of dollars
• Tried and convicted to a prison term of 8 to 25
  years

10
Details

• Kozlowski would manipulate Tyco loan programs
• Gave and received enormous bonuses without board
  approval
• Used company money for personal gains
• Convicted of 22 of 23 counts of grand larceny
  and conspiracy, falsifying business records and
  violating general business law (Crawford)

11
How it Happened

• Tyco held Kozlowski in highest regard
• Senior VP of Human Resources reported to Mark
  Swartz
• Kozlowski labeled personal items purchased by
  Tyco as corporate assets
• Forced confidentiality agreements on parties in
  the know

12
Trends

• What can companies do?
• Allow stockholders to vote
• Make compensation information public
• Relate pay to average employee salary
• Restricted stock

13
Trends

• Change focus
• Exec pay relative to other exec pay in the same
  corporation
• Focus on what shareholders will accept
• Promoting from within