Top Five Stupid Compensation Tricks That Can Lead to Trouble

NEW YORK, NY - January 23, 2002 -- Striking a fair balance when designing executive compensation can be a Solomon-like task filled with plenty of difficult decisions, but according to Compensation Design Group CEO Frank Glassner, knowing what not to do is easier to determine these days.

"Thanks to some egregious examples of bad executive compensation decisions, we can learn from the many companies that are currently in hot water," said Glassner, a 26-year veteran who has designed executive compensation programs for some of the world's largest companies. "The red flags raised by these 'Top Five Stupid Compensation Tricks' will guarantee bad press and shareholder uproar."

Number one on Glassner's list is a CEO who goes over the compensation committee's authority and works directly with the board to change his compensation package. "Here you have someone who is playing by his or her own rules, irrespective of the experts," said Glassner. "A compensation committee is there for a reason and the CEO who disregards this is basically waving a red flag."

Second on Glassner's list is the practice of repricing options to make them worthwhile. "We know that underwater stock won't keep the CEO swimming for long, so the concept is to reprice the option to lower the exercise price and re-motivate the CEO," said Glassner. He noted that shareholders hate this practice, which is akin to changing the rules mid-game. "Besides, when the CEO was supposedly motivated, why didn't it boost performance then?"

Number three on the list is the cancellation of down - and apparently out - options, which are replaced by a restricted stock grant to the CEO. Last year, for example, Tyson Foods canceled 150,000 stock options to its CEO, John Tyson, replacing them with 45,000 restricted shares. "It looks like a legitimate deal, but it makes shareholders wonder," said Glassner. "This is no different than a board setting performance targets for a CEO bonus, then relaxing them when the target is not realized."

Number four on Glassner's list of executive compensation mistakes is the CEO who asks for a special medical fund to finance the insurance deductibles in his or her health benefit package. "On more than a number of occasions, boards have agreed to this practice, only to end up embarrassed when the CEO's first act is to cut everyone else's employee benefits," said Glassner. "It then looks like a case of 'take care of me, but little people be damned.'"

The final questionable action on Glassner's list is the practice of continuing perks for the ousted senior executive. Glassner said that maintaining a perk, such as a country club membership, after booting the senior executive is probably not a good idea. The purpose of a club membership is so the CEO can entertain clients and other stakeholders. "Continuing this perk spares him the embarrassment of being barred from the club because he's been fired," said Glassner. "Well, too bad. He no longer needs to entertain those clients."

Glassner noted that by not following these practices, a company can be assured that its executive compensation program will fall under the "intelligent decision" category rather than the "stupid trick" category.

Headquartered in New York, with offices in Chicago and San Francisco, the Compensation Design Group is an internationally recognized firm that focuses on delivering cost effective and customized compensation, benefits and human resources programs. The company's team of experts is among the nation's top professionals in the field and is dedicated to ensuring that the client experience with the Compensation Design Group is both rewarding and profitable.