In a November 13 article in The Triad Business Journal, Elon Law Distinguished Practioner in Residence John Englar proposes changes to traditional in executive pay structures in order to reward the successful execution of long-term strategies for corporations while minimizing compensation for short term gains.
Englar notes that the financial crisis has focused national attention on excessive pay to corporate executives, including consideration by the federal government to impose pay limits on executives.
Noting that each industry has specific issues to consider when considering pay structures and that prior federal efforts to regulate compensation have failed, Englar argues that an overhaul of executive pay is needed, but that boards of directors for corporations should make those changes, not the government, and that rules governing the structure of boards should be changed to improve oversight of executive pay and performance.
“Rather than federal intervention, corporate governance practices should be restructured to strengthen director independence, and the components of executive pay should be re-aligned,” Englar writes.
Englar recommends changes in four areas of executive pay: base salary, annual bonus, long-term incentives, and perquisites.
Regarding base pay, Englar writes that executive decisions impact more people than any other in the private sector, so their salaries should remain high.
“Annual salaries should support a high quality of living standard (and commensurate charitable giving), but not high enough to support lavish second homes, yachts, planes or their ilk (these benefits should come only via long-term incentives award success),” Englar writes.
Emphasizing the importance of long-term rewards, Englar argues for executive pay through restricted stock incentives with performance-based vesting standards, while eliminating annual bonuses and perks.
Click on the E-Cast link to the right of this article to read Englar’s full column, including his comments on the concept of “clawbacks” and on shareholder voting with regard to executive pay.