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Conference Board Panel Calls for Cuts in Executives' Pay

Management: The group of business veterans issues recommendations but is unable to agree on how to treat options.

September 18, 2002|From Bloomberg News

A panel of business leaders said Tuesday that America's executives are overpaid and called on corporate directors to take steps to rein in compensation, including requiring companies to record stock options grants as an expense.

The 12-member panel of the Conference Board, which includes former Securities and Exchange Commission Chairman Arthur Levitt and Intel Corp. Chairman Andy Grove, issued 23 recommendations in all. The members were unanimous on everything but the options recommendation.

Intended to rebuild confidence in public companies after almost a year of accounting scandals, the report came on the same day that Tyco International Ltd. said former Chief Executive L. Dennis Kozlowski forgave $56.4 million in company loans to employees and treated himself to a $6,000 shower curtain, $96,943 worth of flowers and other items with corporate cash.

"Executive compensation has become disconnected from long-term performance," said Peter G. Peterson, chairman of New York-based buyout firm Blackstone Group and co-chairman of the Conference Board panel. "There is an imbalance between unprecedented levels of executive compensation, with little apparent financial downside risk."

The panel said stock options encourage executives to focus on boosting their companies' stock price in the short term, rather than managing for long-term growth. Options give holders the right to buy shares at a fixed price regardless of where they are trading in public markets.

"The trouble with options is they reward the good, the bad and the ugly in a rising market, and in a bear market they reward nobody," said commission member Paul A. Volcker, a former chairman of the Federal Reserve. "It's like rewarding people by giving them tickets to the New Jersey lottery."

The recommendation that companies treat option grants as expenses was opposed by Volcker--who said they should be phased out entirely as an executive compensation incentive--and by Intel's Grove.

The technology executive endorsed options as a tool to motivate and retain employees and said options can't be accurately valued because their worth depends on the price of shares when options are exercised.

Technology companies such as Intel have used options regularly in lieu of cash to attract and retain employees and have led the resistance to proposals on treating options as expenses, which could reduce corporate profits.

On Tuesday, Semiconductor Equipment and Materials International, a San Jose-based trade group, said its members do not support proposals to expense options. The group said 74% of the workers in its industry receive stock options.

Billionaire investor Warren Buffett, who advised the panel, said it is better to give options an approximate cost than to continue the practice of pretending they have no value.

The Financial Accounting Standards Board, which sets U.S. accounting rules, said it plans to require companies to disclose options expenses quarterly.

The Conference Board recommendations are expected to carry weight.

"There's going to be some acute pressure on big companies that are in the public eye to adopt some of these recommendations," said Joseph Carcello, accounting professor at the University of Tennessee. "The compensation system we've created for executives in this country is in many ways the source of our problems."

Among the panel's other proposals: requiring executives to give advance public notice of plans to sell shares in their companies, making directors and top managers hold stock for extended periods and entrusting executive pay decisions to compensation experts hired by independent board members rather than by management.

The Conference Board panel said that it would conduct a national campaign to persuade public companies to adopt its recommendations.

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