Miller: There are a few things that are good about them, starting with appeasing a very angry public and showing that the Administration is trying to take control of the situation. I like the idea of clawbacks, which was part of the Sarbanes-Oxley Act. The new rules make them more specific, insofar as applying to the 25 most highly compensated employees. The whole underlying premise of a bonus is 'pay for performance.' If there is no `performance,' the bonuses should not have been 'paid.' It's straightforward and a good provision. The challenge is to determine when financial results, and therefore compensation, are based on materially inaccurate statements of earnings, revenues, and so forth. Sometimes a restated result is not the fault of anyone; it could be an accounting change. That will be tough, but overall this is a very reasonable policy.

Consulting: What's your view on other new pay provisions, such as the requirement that incentive compensation must be paid in the form of restricted stock and not cash; that the value of this incentive cannot be greater than one-third of the employee's annual compensation; and the restricted stock will only vest once the government obligations are repaid. Like 'em or loath 'em?

Miller: The provision about the vesting of restricted stock only after the government is repaid passes the common sense test. These are pay for performance rewards and part of performance is repaying the government loans. This is very reasonable and very taxpayer-friendly. The President is saying to taxpayers: 'These executives are only going to get paid in restricted stock after we get our money back.' This makes complete sense, but there are some potential flies in the ointment. By limiting the restricted stock to one-third of annual compensation, you potentially create a situation where unless you limit the other portion of annual compensation—cash salary—you could have a situation where companies make up the difference by increasing base salaries. With the $500,000 cap not part of the new law, it creates the unintended consequence of possibly driving up salaries not directly related to performance. Obviously, that begs the question of revisiting the $500,000 cap or some other salary restriction.

Consulting: So caps are king in your opinion?

One on One with Executive Compensation Advisors' Russell Miller

Related Stories

Recommended For You