Another nail in the coffin of public companies

Posted by Marc Hodak on March 9, 2009 under Executive compensation, Invisible trade-offs | Read the First Comment

When I saw the headline, “Activists Push for Lid on ‘Golden Coffin’ Death Benefits,’ I immediately thought, oh God, what manner of micromanagement are the activists trying to impose on hapless boards now?

Golden coffin is the perjorative term, loved by unions and the media, for a form of tax-efficient deferred compensation.  They are somewhat complicated structures, but they have two two salient properties:  (1) they can sometimes be low-cost ways of providing senior executives with certain estate-planning or tax benefits that they greatly value, and (2) they provide a stream of payments, instead of a lump-sum, to the beneficiaries–what one might call a form of guaranteed pay.

Boards and the executives they hire clearly like the first property.  They probably would be just as happy to provide this perk in the form of a straight salary, but the tax code makes that the most expensive way of delivering marginal compensation to the top five executives.  Boards and managers, looking for a more tax efficient way, came up with this deferred compensation method.

Critics are fixated on the second property. Says Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees (AFSCME), this form of compensation is “the ultimate nonperformance-based perk.”

No, Mr. Ferlauto.  That would be salary, i.e., the thing that AFSCME works hardest to secure for your union constituents while you insist that every dollar earned by a private sector executive must be performance based.

Unfortunately, Mr. Ferlauto, like his CalPERS counterpart who calls this benefit “unearned compensation,” is a fiduciary for his union’s trust fund.  These gentlemen are doing their members a disservice by forcing companies in which they are invested to find higher cost ways of delivering competitive compensation to their executives.

The basic problem is that unions don’t believe that companies really need to compete for their executives.  They believe that all compensation is just a matter of how much you can wrest from the corporation, and object when they think it’s senior management doing the wresting.  They believe that boards are always looking for ways to shove ever more dollars into the pockets of their benighted CEOs with whom they have the coziest of relationships.  If the unions were right about all this, then we should see CEO turnover somewhat resembling that of, say, AFSCME workers.

Alas, once again we witness the spectacle of union representatives of workers with well-above-market compensation crowing about pay in what is probably the most liquid market for talent anywhere on Earth.  Par for the course.

What’s disappointing is the support these unions are getting from more thoughtful critics of corporate governance like RiskMetrics, who advise institutional investors.  For example, in the case of Disney, RiskMetrics contends that the promise of post-mortem payments “do not reinforce the company’s pay-for-performance philosophy.”  This about a company whose CEO gets about 65 percent of his compensation based on performance.  Such pronouncements can only undermine the credibility of RiskMetrics in the eyes of institutions that, unlike the union pensions, truly care about shareholders.  The voice of a powerful advocate for good governance is a terrible thing to waste on such a populist issue.