![\"\"](\"http:\/\/www.riskmanagementmonitor.com\/wp-content\/uploads\/2011\/12\/danger.jpg\" "\\"Risky\\"")
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On Monday, Staples, Inc will try to win its “Say-on-Pay”<\/a> vote with ISS recommending against approval the executive compensation plan.\u00a0 ISS made its recommendation based on its usual arbitrary, micro-managing concerns<\/a> which are not the subject of this post.\u00a0 Here, I want to highlight the problem Staples created for itself, without anyone’s help, and unintentionally revealed in this pair of sentences<\/a>:<\/p>\n The [Compensation] Committee … recognized the need to address retention of key talent and to continue to motivate associates in light of the fact that we did not pay any bonus under the Executive Officer Incentive Plan or Key Management Bonus Plan in 2013 and 2012.<\/span><\/em><\/p>\n As a result of the changes to the compensation program in 2013, an average of 84% of total target compensation (excluding the Reinvention Cash Award) for the NEOs was \u201cat risk\u201d based on performance results, and 100% of long term incentive compensation was contingent on results.<\/span><\/em><\/p><\/blockquote>\n Anyone reading Staple’s proxy could be forgiven for thinking that these two sentences have nothing to do with each other, notwithstanding that they appear consecutively in this proxy.\u00a0 It’s clear that neither the authors of this disclosure nor the board that approved it saw the connection, either.\u00a0 But look carefully at what they are saying.<\/span><\/p>\n The first sentence says that a lack of bonuses has created a retention risk with regards to key employees.\u00a0 The second sentence basically says that the company has affirmed a compensation structure that insures that future performance setbacks will re-create this retention risk.\u00a0 Not to pick on Staples, you will find a similar compensation structure at most public U.S. corporations. Among public companies, having 80% to 90% of target total executive pay derived from “at-risk” compensation, i.e., variable pay such as bonuses, has become the norm.\u00a0 Thus, even if the bonus plan is perfectly designed to pay for performance, or, I should say, especially<\/em> if it is so designed, a company is guaranteed to eventually encounter management retention problems.\u00a0 After a couple years of poor performance–which can happen despite good management–key employees will be getting only a fraction of what they can earn elsewhere, and will get restless.\u00a0 In fact, the only way to avoid retention problems with such a skewed compensation structure is to fudge on “performance-based” awards when things are bad.\u00a0 That is what got Staples (and many other companies) into trouble. Of course, paying people when performance is bad when you say you won’t is, as ISS might say, problematic.\u00a0 It undermines the integrity of your incentive plan, creates cynicism among employees who don’t benefit from such forgiveness when the company is going through tough times, and causes external constituencies to look askance at your governance.\u00a0 ISS, according to its myopic focus on compensation costs, simply blames the board for awarding bonuses that were not deserved.\u00a0 They ignore the underlying cause, which is an unsustainably risky compensation structure.\u00a0 In other words, too much target compensation is “at-risk.”<\/span><\/p>\n In fairness, this root cause is invisible to virtually every other corporate critic, investor, board member, and compensation consultant.\u00a0 In fact, this ridiculous skew toward performance-based pay is one of the few things that all of these constituencies buy into.\u00a0 But whenever the problem with this structure is made clear to institutional investors, so they can see the downside of paying senior executives like car salesmen getting lottery tickets in lieu of cash commissions, <\/span>you can see the light go off over their heads.<\/span> “Oh, yeah.\u00a0 Why do boards do that?”
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