Sunday, June 17, 2007

Hear Ye, Hear Ye: Corralling Executive Pay

Published: June 17, 2007

EXAMINING insider stock transactions has always helped investors gauge managers’ confidence in their own company’s prospects. Shareholders who hear an executive boast of a grand strategic plan while dumping piles of his own stock have a right to be dubious. Actions speak louder than words, after all.

Now, a group of investors is arguing that an analysis of a company’s pay practices can provide similar insights into managerial confidence, and they have established a shareholder forum to demonstrate how such an assessment might be made. The forum, set up last week, will use Verizon Communications as a test case.

While investors often become upset about executive pay, they rarely use compensation practices to guide buy or sell decisions on stocks. And yet, because pay is supposed to be closely linked to a company’s future performance, analyzing its structure should, in theory, reveal a good bit about executives’ confidence in their business plans.

“No analyst or investor is going to understand the market conditions associated with achieving objectives as well as a manager does,” said Gary Lutin, an investment banker at Lutin & Company, who is chairman of the shareholder forum. “So the key is to find out whether the manager is betting his pay on reaching those objectives.”

For example, if a chief executive stands to receive 80 percent of a bonus by achieving just 20 percent of the objectives, investors may think twice about betting their retirements on those efforts.

Trouble is, investors usually get only sketchy information about the performance goals that managers must meet to earn their incentive pay. Even after parsing this year’s more detailed pay disclosures, it is hard to tell when compensation practices indicate that corporations will pay managers for succeeding rather than for merely showing up. That’s because performance goals are maddeningly vague; benchmarks such as growth in earnings per share, revenue or cash flow are common, but the rate of growth required to receive a bonus is not often disclosed.

Companies are loath to share too many details about performance pegs because, they say, that might give away corporate secrets to competitors.

But it doesn’t have to be this way. So argues Mr. Lutin and the Association of BellTel Retirees Inc., a group of 110,000 former Verizon employees that is another organizer of the shareholder forum. The Belltel Retirees own shares in Verizon and have an interest in its long-term success. The group has prodded Verizon to link executive pay more closely to financial performance and has submitted a variety of other compensation proposals.

The forum wants to give investors the tools they need — without compromising proprietary corporate information — to understand the parameters executives have established for measuring success.

The group chose Verizon because its stock has traded at a discount to its competitors’ — a discount based at least in part on perceived risks about its huge and costly bet on FiOS, an all-fiber network it is building to wire consumers’ homes. FiOS delivers digital television and high-speed Internet services, and Verizon’s chief executive, Ivan G. Seidenberg, hopes to persuade consumers to adopt FiOS and ditch their cable companies.

Another reason the group picked Verizon is that investors have criticized Mr. Seidenberg for the hefty compensation he secured in years when his company’s stockholders fared poorly. Verizon is also one of a handful of companies where a majority of shareholders supported a say-on-pay proposal that would give its investors a voice on pay practices each year. That proposal passed at Verizon with 50.1 percent of the vote.

But it is the company’s big bet on FiOS that makes it a perfect test case for the forum. Mr. Seidenberg has asked shareholders to bet on the FiOS strategy; the question is, is his pay package tightly tethered to FiOS’s success as well, or is Mr. Seidenberg avoiding that particular gamble?

“They’re making huge capital outlays and it’s not something that can be completed overnight,” said C. William Jones, the president of the BellTel Retirees and a former strategic development and planning executive at Verizon. “They’ve got a good strategy and they are working toward it. But I believe that if we had a forum where there was a freer exchange of information, it would make the investment community less suspicious.”

The forum will be free of charge and open to all Verizon shareholders, both institutional and individual. Other investment professionals can also participate, such as money managers and members of the New York Society of Security Analysts. (Information about the forum is on the Web at

Robert A. Varettoni, a Verizon spokesman, said that the company was evaluating the invitation to communicate with shareholders in the forum, but that it would wait until the Securities and Exchange Commission has issued guidance about online exchanges before it partakes.

“The S.E.C. has explored many aspects of shareholder communications, including online discussions,” Mr. Varettoni said. “The S.E.C. has indicated that it will issue proposed rules on this topic in the coming months, addressing some of the questions raised, including selective disclosure of nonpublic information and a company’s liability for content posted in a forum by third parties.”

But Mr. Lutin said that forum programs he had run in the past had no unusual online aspects and had simply followed old-fashioned meeting processes for which S.E.C. rules are well established.

For his part, Mr. Lutin hopes that the Verizon forum will show investors how to get specifics on pay to help them to make informed investment decisions. This test could lead to examinations of other companies’ pay practices.

“If you start seeing the people who buy and sell stocks asking these questions, no executive will be caught touting some business plan and then be caught having to say that his bonus is not based on it,” Mr. Lutin said.

Perhaps directors will also pay more attention to ensuring that compensation is more closely tied to strategies executives are promoting. Every day, managers ask their boards — as well as their shareholders — to have confidence in their long-term business strategies. But if managers are not betting a large portion of their pay on the success of those strategies, why should investors or directors go along?