Tag: Cari Tuna

Executive Compensation, Where Everyone is Above Average

lake-wobegon

It seems like executive compensation consultants come from Lake Wobegon, where “all the women are strong, all the men are good looking, and all the children are above average.”

I think executives should be compensated for out-performing their peers. They shouldn’t be punished for a negative performance due to external forces if they still out-performed their peers. Further, they shouldn’t be rewarded for a positive performance, if they under-performed their peers.

The magic is in picking the peer group to compare. Ideally, a peer group should include companies that are similar along several characteristics (e.g., industry, size, diversification, and financial constraints). Of course matching all of those characteristics would lead to a very small group for comparison.

In an article in the Wall Street Journal, Cari Tuna points out that Tootsie Roll Industries used Kraft Foods as a peer for deciding how much to pay its executives. Tootsie had $496 million in sales and Kraft had $42.2 billion in sales.

A study by Ana Albuquerque of Boston University examined what needs to go into selecting the peer groups. She found that having the the same industry and size quartile shows the best evidence for creating a relative peer group for executive compensation. In a second study, she found that companies tend to choose peers that pay their CEOs more, which in turn translates into firms paying their CEOs more.

In their study, Michael Faulkender of the University of Maryland and Jun Yang of Indiana University came to the conclusion that “compensation committees seem to be endorsing compensation peer groups that include companies with higher CEO compensation, everything else equal, possibly because such peer companies enable justification of the high level of their CEO pay.”

You can also add into the mix that the company may not want to seen as having a CEO who is below average. If your CEO is below average, then your company may be below average.

If you’re a CEO of a public company, it’s getting harder and harder to be below average.

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Corporate Blogs and Tweets Must Keep SEC in Mind

ebayink

Richard Brewer-Hay made it into the Wall Street Journal and even got his photograph included. Who is he? He is part of the next wave of investor relations professionals who are using web 2.0 tools to provide investors with company information. In 2008, Richard started using a blog as part of eBay’s investor relations: eBay Ink Blog.

Richard then saw Twitter as a useful tool for sending out investor relations information. eBay’s lawyers even gave it their blessing. (After they found out about it and required some disclosure language.) The first big test was the March 11 shareholder meeting where he live tweeted from the audience, broadcasting the meeting beyond the four walls of the room.

The Securities and Exchange Commission laid the groundwork for this approach in the August 2008 Guidance on the Use of Company Website [Release 34-58288] (.pdf) The SEC stated that: “We acknowledge the utility these interactive web site features afford companies and shareholders alike, and want to promote their growth as important means for companies to maintain a dialogue with their various constituencies.” At today’s Society of American Business Editors and Writers convention in Denver, Mary Schapiro noted that the SEC favors greater and broader disclosure [using Twitter and other tools to communicate with investors] but that it hasn’t come to a resolution on the new technology.”

The first step is the analysis of whether and when information is “public” for purposes of the applicability of Regulation FD. In the guidance, the SEC laid out a three part test for “companies to consider whether and when: (1) a company web site is a recognized channel of distribution, (2) posting of information on a company web site disseminates the information in a manner making it available to the securities marketplace in general, and (3) there has been a reasonable waiting period for investors and the market to react to the posted information.”

The next step is to consider whether and when postings on their web sites are “reasonably designed to provide broad, non-exclusionary distribution of the information to the public.” (Rule 101(e)(2) of Regulation FD.

Lastly, the company needs to keep in mind that the antifraud provisions of the of the federal securities laws, including Exchange Act Section 10(b) and Rule 10b-5 are applicable to the content of its web site.

It was great to see eBay’s effort being lauded in the WSJ. It is strange that other companies have not joined the trend. I would guess that there is a lack of business results associated with the transition from web 1.0 to web 2.0. To make the transition, an investor relations professional would need to show that one of the following is true:

  • Increase in share price
  • Reduction in securities and shareholder litigation
  • Reduced costs
  • Increase in revenue

I think it is hard to show that they could achieve any one of these goals. Perhaps you could show that the content management of a blog is less expensive and easier to maintain than a commercial product. WordPress (which powers Compliance Building) is free and offers great content management tools.  You would also need to make the transition from using the public relations news wire services to the blog platform in order to comply with the selective disclosure rules of Regulation FD.

Personally, I think it is the better way to go. Companies can better control the message by using their own website to communicate with investors. But you nee people like Richard to prove the value proposition. We also need the SEC to take a better position on using these tools.

Are there other companies making the most of web 2.0 and joining the Investor Relations 2.0 movement?

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