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Designers of Executive Salary Plans Fear More Abuses October 5, 2002 By DAVID CAY JOHNSTON LAS VEGAS, Oct. 3— The people who design and administer corporate pay plans say they bear some responsibility for excessive executive pay and they warned at a conference here that new and expected pay reforms can easily be abused to enrich executives unjustly. About 1,600 members of the National Association of Stock Plan Professionals also agreed at their annual conference here that the people most likely to lose out under pay reforms are rank-and-file workers who now get stock options, but may lose them and not have their value replaced. Stock options were a road to riches for many executives in the bull market. Executives liked them because a rising market lifted almost all stocks, and the cost, while deductible for tax purposes, was not treated as an expense that reduced profits reported to shareholders. Instead, options diluted ownership, which subtly reduced returns to shareholders. George B. Paulin, president of Frederic W. Cook & Company, a leading pay consultant, said that consultants bore part of the responsibility for excesses because they did not fully warn of how stock options, restricted stock and other devices could be exploited by executives. He said the focus now should be on adopting the best practices to make sure shareholders do not pay more than necessary for executive talent. Mr. Paulin also warned that reforms can be abused. "As we clean up one set of abuses," he said, "we don't want to start another set of abuses." He cited swaps of options for cash or restricted stock as an area open to abuse. "You could make it look like you have cut the C.E.O.'s pay by 36 percent when in fact by replacing option values with cash bonuses" the executive ends up with more money than if his pay package had been left untouched, he said. Mr. Paulin said the problem lay in the most widely used technique to value options, known as Black-Scholes. "The fact is that Black-Scholes values are too high," he said. "No investor would buy an option in the open market at Black-Scholes values." Mr. Paulin emphasized that options and restricted stock, which became widespread in an effort to align the interests of executives with shareholders, are the main reasons that some executives were paid far too much. He added that "transparency is needed" on perks and retirement benefits because inadequate disclosure also makes them prone to abuse. Salary and bonuses, he said, generally have not been abused. "Their salary and bonus, relative to rank-and-file pay," has not changed all that much since 1975, he said. Back then, many chief executives earned around $300,000 in salary and bonus, or $1 million in today's dollars. A typical salary and bonus today is about $3 million, according to Pearl Meyer & Partners, a pay consulting firm in New York. A few dozen companies, notably Coca-Cola, have announced that they will now expense options. But only a handful of association members here raised their hands in support of treating stock options as an expense on company earnings statements. Many said that if expensing was required, which is widely anticipated, the rules needed to be refined to eliminate distortions to profit statements when options lapse because of falling stock prices or are given up by departing executives. Jesse M. Brill, publisher of Corporate Executive, a newsletter on pay practices, recounted how for years he railed against huge stock option grants and inadequate disclosure of retirement benefits, but few listened. Shareholders, both institutions and individuals, must be vigilant about new pay practices, he said, or "the problems with runaway compensation will continue." "As we toss out things that are bad," Mr. Brill said, "I fear they will be replaced by things that are worse, but the Securities and Exchange Commission is looking at what was and not what is coming." Mark Borges, the senior pay disclosure expert at the S.E.C., said that news reports about pay and perks for the former chief executives of General Electric and Tyco International "have demonstrated to the staff that either the disclosure rules are not clear enough on what needs to be disclosed or else the level of monitoring by the staff is inadequate." Referring to annual reports filed with the S.E.C., he said "there is an obvious requirement to disclose contracts with the executives, and I am astounded every time I look in the most recent 10-K and the agreement is not mentioned." He said his staff eventually found all such contracts by combing through previous quarterly reports. Michael Gettelman, a securities lawyer who edits The Corporate Counsel, a newsletter on executive compensation, urged a rule requiring immediate disclosure of employment and departure contracts through an 8-K, a type of report closely watched by analysts, reporters and some investors. Mr. Borges agreed there was a problem with delayed disclosure and said he would consider the idea. http://www.nytimes.com/2002/10/05/business/05PAY.html?ex=1034826432&ei=1&en=8f391900d3225aa9 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact [EMAIL PROTECTED] or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to [EMAIL PROTECTED] Copyright 2002 The New York Times Company <A HREF="http://www.ctrl.org/";>www.ctrl.org</A> DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance—not soap-boxing—please! 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