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Shareholders look at executive pay.

For the shareholder, information about executive compensation presents an investment opportunity. First, a company's compensation plan can guide the shareholder in making buy/sell decisions. As Graef Crystal points out, in "In Search of Excess: The Overcompensation of American Executives," an investor can do well to consider the use of restricted stock grants in a compensation package as evidence of the board of directors' highly informed opinion that the stock is not likely to go up.

Second, shareholder initiatives to better align the interests of management and shareholders can themselves be an investment. A report issued early last year by Wilshire Associates found that the shareholder initiatives sponsored by the California Public Employees Retirement System resulted in a net return of $137 million above the S&P on an investment of about $500,000. And these initiatives did not have to get majority shareholder support to realize the extra value. The simple fact that shareholders visibly focused on these companies was enough to produce the favorable results.

So it's worthwhile for shareholders to focus on executive compensation. Complaints about pay can be made in a soundbite with political, economic and even gossip appeal. And it's easy and inexpensive for them to do so. A shareholder can submit a shareholder proposal about executive compensation for little more than the cost of a stamp. And under the Securities and Exchange Commission's new proxy rules, the shareholder can also distribute information about executive compensation to other shareholders for little more than the cost of a couple of dozen letters or phone calls. With the likelihood that such action will improve returns simply by putting the spotlight on compensation and the fact that there is little or no downside risk, this is an "investment" that shareholders, especially fiduciary shareholders, will find increasingly appealing.

Probably the most frequent misunderstanding about the conflict of interest between shareholders and management with regard to pay is not the amount, but the variability of the pay. Shareholders want pay to vary with performance as much as possible, but managers understandably want as much certainty in their pay as possible. Even those managers who want variability on the upside are less willing to allow it on the downside.

In the last year alone, the issue of executive compensation has been transformed by four factors: the increased sophistication of shareholders on compensation issues; improved disclosure requirements; the reversal of the long-time SEC policy prohibiting shareholder resolutions relating to executive pay; and the freedom shareholders now have to communicate with each other under the revised proxy rules. But even under the old rules, which restricted shareholders in the extent to which they could communicate with one another, shareholder resolutions got substantial support.

Pay that is not related to performance is clearly one of the first things shareholders are looking for in exploring executive compensation as an investment opportunity. Other red flags:

* Members of the compensation committee who are not genuinely independent (including service providers, such as the company's lawyer or investment banker as well as interlocking directorates); * restricted stock grants, unless they are a genuine offset from cash compensation;

* the "guaranteed bonus"--the ultimate oxymoron--and other pay packages with all upside and no downside;

* repricing of underwater stock options;

* option plans that fail to account for overall rises in the stock market;

* and performance plans where measures of performance are so low that achievement is unavoidable.

Nothing is of greater interest to an investor considering whether to buy or sell than whether the company has an incentive scheme that aligns the interests of management and shareholders. Nothing is of more interest to a shareholder who is considering candidates for election to the board, including members of the compensation committee, than the priorities reflected in the compensation plan they approve. In 1993 and beyond, shareholders will use the increased clarity and consistency of the information available to them as a result of the SEC's new proxy rules to make decisions about when to buy and sell and about when to submit or support a shareholder initiative. And directors and management will no longer have the luxury of the SEC pre-clearance rules to track shareholder communication on these issues. They will have to take the initiative to reach out to the shareholders and address their concerns.

Ms. Minow is a principal of LENS, Inc., a Washington, D.C., investment fund dedicated to maximizing the value of institutional shareholdings in underperforming companies through shareholder activism.
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Title Annotation:Executive Compensation in the Spotlight
Author:Minow, Nell
Publication:Financial Executive
Date:Jan 1, 1993
Previous Article:Charting performance: the SEC's new disclosure rules.
Next Article:Can stock compensation accounting accomplish anything that disclosure can't?

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