Best of the best: painting a complete picture
As shareholders become increasingly vocal about executive pay, General Electric Company (GE) has been earning high marks – and a Corporate Secretary Magazine Award – for ‘Most effective compensation disclosure’. Clear and straightforward communications are helping to set GE apart.
‘As I track companies who try to do a good job of disclosing compensation both for executives and directors, I often point to GE as the model in terms of the clarity with which they present the information,’ says Charles Tharp, executive vice president of policy at The Center on Executive Compensation. ‘Their narrative is very clear. ... While there’s an awful lot of information there I find it very readable.’ Tharp says GE’s compensation structure for its top five executives is ‘very much focused on the overall corporation’ and ‘developed in a way that is incredibly friendly for shareholders.’ In the compensation committee charter, he says, ‘It is just so clear what [they] are responsible for and what they look at.’
Clarity and simplicity are at the heart of GE’s executive compensation program, not just its communications. ‘Our Compensation Discussion & Analysis (CD&A) is really very simple and concise and that is a reflection of our underlying compensation program,’ explains Chris Pereira, corporate and securities counsel at GE. ‘We started off with a program that is not very complex compared to [those of] other companies. So summarizing our policies from that standpoint was probably easier compared to the task that some of my other colleagues had to face.’
Uncomplicated pay means easy disclosure
Pereira says GE’s compensation programs are purposely designed in a ‘simple and transparent manner’ that is understandable to shareholders. ‘That simplicity, in our view, is critical to driving performance,’ Pereira says. As detailed in the company’s proxy, compensation programs at GE emphasize ‘consistent performance’ not just for the current year but for ‘sustained periods of time.’ They also provide ‘future pay opportunities versus current pay’ (striving for a balance between cash and equity compensation); have a ‘discretionary nature’, which includes both qualitative and quantitative factors; and reflect an executive’s contributions to GE’s overall performance as a company instead of focusing on an executive’s individual function or business.
‘We don’t have rigid tables or graphs [in the CD&A] because one of the key components of our executive compensation program is that it’s discretionary,’ comments Pereira. ‘So the structure is very simple and the format is very narrative, which is a reflection of the discretionary nature of the program.’ Overall, Pereira says that GE is ‘very much focused’ on qualitative performance metrics. ‘We don’t think that just focusing on quantitative performance measurements is the right incentive to build shareholder value in the long term.’
Pereira adds that GE’s CD&A tries to reconcile compensation with the true economic value realized in executive performance. The compensation disclosure regarding the company’s chairman and CEO is the most detailed since shareholders typically have a keen interest in understanding how a CEO is compensated.
‘What makes our compensation disclosure different is that we see compensation as part of leadership development,’ observes Pereira. In fact, even the name of GE’s compensation committee, the management development and compensation committee, reflects that overall philosophy.
Open dialogue on performance metrics
Developing leaders is so important at GE that the company decided to provide shareholders with more information about how they use executive compensation as a tool for leadership development. To supplement the compensation disclosure required in the proxy, GE included a letter from its management development and compensation committee chairman, Ralph Larsen, in the company’s 2007 annual report.
Larsen’s shareholder letter mentions the various types of compensation GE uses to reward executives for ‘recent and long-term performance.’ It also lets shareholders know that ‘as executives rise within GE, an increasing percentage of their total compensation is at risk meaning it is contingent on reaching targets based on things like solid increases in revenues, returns, earnings per share and cash flow.’ The letter makes it clear that GE purposely structures annual incentive compensation or bonuses to focus performance on longer term contributions. ‘We don’t want to encourage our people to chase short-term trends or take excessive risks to create a single period of good results,’ writes Larsen. ‘That’s why these bonuses are linked to previous years, taking into account not just what an executive did this year, but also their performance and bonus in prior years.’
Although GE typically doesn’t offer employment contracts or golden parachutes, their executive compensation programs are helping the company to recruit, develop and retain leaders. Fulfilling work experiences combined with training and rewards keep voluntary turnover low in the executive ranks. In fact, the company’s 189 most senior executives have an average tenure of over 20 years.
Beyond the usual planning to fine-tune compensation programs and disclosure practices, GE monitors the market and evaluates the regulatory landscape. These days, Pereira and his peers at other companies are looking at the additional regulation that the Troubled Asset Relief Program (TARP) imposes in terms of executive compensation. He says, ‘Even the companies that are not subject to those new regulations are taking a close look and considering: Are there components of it that we should incorporate into our compensation program and subsequent disclosure? … What makes sense? What are good ideas?’
Peer assessment is important and although they may not be in GE’s peer group, four other companies made the shortlist for compensation disclosure. They are Allstate, MBIA, MDU Resources and Schering-Plough. The presentation was sponsored by the Altman Group.
‘We intend to keep our best practices and make sure that they remain best practices,’ says Pereira. ‘You certainly have to be very quick on your feet and really monitor the market and developments now.’
‘We will obviously keep on monitoring and try to continuously improve what we are doing,’ he concludes.