06

Document Sample
06 Powered By Docstoc
					Page 6                                                                     The Metropolitan Corporate Counsel                                                                           July 2005

Project: Corporate Counsel Part I (Unintended Consequences) – Law Firms
Executive Compensation: A Practice Area In Transition Since
The Corporate Scandals
The Editor interviews Michael S.                                                                   gets it wrong, and the compensation is too          is in order but not a severance package that
Sirkin, Senior Partner in the Executive                                                            generous, it is rightfully the recipient of crit-   essentially permits him to retire a rich man.
Compensation and Employee Benefits                                                                  icism. If the committee fails to be generous
                                                                                                   enough, the company runs the risk of losing         Editor: Equity compensation has
Group at Proskauer Rose LLP.
                                                                                                   key executives, and it, the committee, is           received considerable attention since the
                                                                                                   equally subject to criticism.                       scandals. If the committee gets it wrong
Editor: Mr. Sirkin, would you tell our                                                                                                                 in the sense of overcompensating, it can
readers something about your profes-                                                               Editor: What about disclosure responsi-             be accused of dereliction of its primary
sional background?                                                                                 bilities? Is more better than less these            responsibility to the shareholders. If the
                                                                                                   days?                                               committee gets it wrong by not compen-
Sirkin: I graduated from Columbia Law
School in 1972, and after a brief time with a                                                      Sirkin: A corporate board or board commit-          sating enough, it may fail to incentivize
small firm involved in securities work I                                                            tee, to say nothing of the senior manage-           the executive – the whole purpose of the
joined Gilbert, Segall & Young, where I                                                            ment team, should engage in no conduct              exercise – and that, too, can be a derelic-
spent the next 15 years. ERISA was enacted                                                         that they fear seeing on the front page of the      tion of duty. How do you walk this
at the start of my career, and I was invited to                                                    newspaper. As much as possible should be            tightrope?
become the firm expert on it, in addition to                                                        disclosed to the shareholders and to the gen-
my corporate practice. From that combina-                                                          eral public. That said, it is an open question      Sirkin: The first step in this particular exer-
tion, my practice evolved into executive                                                           whether simply more disclosure helps or             cise is to determine what the executive
compensation, which is a combination of                                                            adds to the confusion. Much of what is dis-         should be awarded if the company is suc-
the two areas. I came to Proskauer in 1989,                                                        closed in the present climate is highly tech-       cessful. Success may be the result of an
                                                              Michael S. Sirkin                                                                        executive having done a good job, but even
and I’ve been here ever since.                                                                     nical in nature, and it is unclear how much
                                                                                                   this type of disclosure adds to the discus-         if it means nothing more than that he did not
Editor: What          attracted      you    to    Sirkin: I think that the compensation com-       sion. The key should be to make the disclo-         get in the way of the marketplace, it is to a
Proskauer?                                        mittee has the most difficult job of any com-     sure understandable and focus on the                degree welcome. It is also necessary to
                                                  mittee of the board. Many disagree and say       material items.                                     determine what he receives if the company
Sirkin: I was particularly attracted to           that it is the audit committee that has the                                                          is not successful. Both positions must be
breadth of the practice and the firm’s com-        toughest job. Certainly the audit committee                                                          worked out in advance. It is important to
mitment to clients in the compensation and                                                         Editor: In the end, the committee must
                                                  has considerable responsibility and expo-        make decisions which have a strong sub-             avoid the situation where the executive
benefits area. This area was becoming             sure to liability, but there is general agree-                                                       receives a substantial award notwithstand-
increasingly complicated, and it was a mat-                                                        jective element – what is a particular
                                                  ment on the intended results for the audit       executive worth? Many factors must be               ing the fact that the company is not success-
ter of some importance that I have the            committee. That is not the case with the                                                             ful, but at the same time to provide him with
strong support of a labor practice and a                                                           weighed. Please tell our readers which
                                                  compensation committee. The compensa-            ones ought to be emphasized and which               reasonable security.
securities practice as backup for my own.         tion committee members must walk a very          ones avoided.
                                                  fine line between incentivizing the execu-                                                            Editor: How do you deal with the vesting
Editor: Please describe your practice.            tives and giving them security and not                                                               of equity rights on termination? Are
How has it evolved over the course of                                                              Sirkin: There is a strong subjective element
                                                  overly rewarding them if they are unsuc-         here, and each situation is different. For          there any “best practices” here?
your career?                                      cessful. The challenge is to come up with        example, if the committee is dealing with an
Sirkin: My practice today is a combination        solutions everyone can live with.                employee who has come up through the                Sirkin: Generally there should be no or lim-
of employee benefits and executive com-                                                             ranks of the company it is important to             ited additional vesting on the termination
pensation. On the executive compensation          Editor: What outside expertise – consul-         assess the culture of the company and the           after a relatively short period of employ-
side, I do a lot of work for companies set-       tants, lawyers etc. – should the committee       precedents that have been established in            ment because the executive has not earned
ting up a variety of non-qualified and equity      utilize in its deliberations?                    connection with rewarding high perfor-              it. There are situations, however, where the
plans for their executives. I am also engaged                                                      mance and fair arrangements for retirement          executive is terminated because of a person-
in advising compensation committees, and,         Sirkin: The compensation committee mem-          after long service. It is also necessary to         ality clash or a difference with the govern-
on the other side of the fence, I represent a     bers do not have to be experts themselves,       review precedents where things don’t work           ing board concerning corporate goals. The
large number of senior executives in negoti-      although they should be reasonably knowl-        out, and the executive must be eased out.           executive should be rewarded for the work
ating employment and severance agree-             edgeable about the area and understand the       Where the committee is trying to bring in a         he has done in such a circumstance, pro-
ments. On the employee benefits side, I            concepts. Every compensation committee           new senior executive from the outside, an           vided, of course, the work merits reward.
handle all aspects of traditional employee        needs to retain a compensation consultant,       added complication concerns what that per-          There is an additional problem where the
benefits work, and, in addition, I have           and in many cases they should have their         son is giving up. Good compensation com-            executive has been brought in laterally. Very
developed a special expertise in benefits and      own compensation lawyer. The added               mittees work hard to find the middle                often the equity segment of his compensa-
compensation for tax-exempt organizations.        expense this entails is modest compared to       ground, and giving the committee some lat-          tion is makeup equity. On termination –
                                                  the sums under discussion, and access to         itude, some freedom to compromise – with-           where he is leaving involuntarily – the vest-
Editor: Would you share with us the ways          industry data and information on the market      out, of course, giving away the company –           ing of additional equity is often justified.
in which your practice in general, and the        injects an element of fairness and objectiv-     is always a good idea.                              This may also be the case where the execu-
executive compensation area in particu-           ity into the process that is extremely impor-                                                        tive receives reduced base salary or cash
lar, has changed since the recent corpo-          tant. Doing without means running a              Editor: Would you share with us the par-            bonuses and his compensation is intention-
rate scandals.                                    significant risk and, more importantly, not       ticular challenges that the compensation            ally heavily oriented towards equity.
Sirkin: The practice has become broader in        achieving the desired goal.                      committee faces in fixing a severance
scope and more complicated. With Sar-                                                              package for a CEO departing involuntar-             Editor: In light of what appears to be an
banes-Oxley, new SEC and other federal            Editor: And the use of benchmarks and            ily.                                                enhanced exposure to liability on the part
regulations, new rules from the securities        comparative data? How does this square                                                               of corporate directors of public
exchanges, new accounting rules, new tax          with the reality of corporate America –          Sirkin: I think there are two sides to this.        companies, have you encountered evi-
rules on deferred compensation, and emerg-        where each company prides itself on hav-         The ideal situation is to have severance pre-       dence of a reluctance to serve on corpo-
ing case law, we have to consider a variety       ing a “unique” culture?                          scribed in the contract going in. A contract        rate boards?
of new factors in everything from develop-                                                         of employment is like a pre-nuptial agree-
ing equity plans to negotiating employment        Sirkin: This is one of the most difficult         ment: they both should be written when              Sirkin: The most important issue for per-
arrangements. In advising our clients, we         issues that the compensation committee           everyone is in love, not when things are            sons looking at whether to accept an invita-
must also pay attention to what the invest-       faces. Peer data can be misleading. And it       falling apart. Again, it is important to try to     tion to join the board of directors of a public
ment community is saying, to say nothing of       can also be tweaked to say a lot of different    establish a fair and objective middle ground        company concerns satisfying themselves as
the pronouncements of governmental agen-          things. The challenge is to come up with a       that provides the executive sufficient pro-          to the quality of the CEO, CFO and the rest
cies. Above all, lawyers who negotiate            standard that is both fair and reflects the       tection against, say, a termination based on        of the senior management team. Right up
employment contracts from any side must           marketplace. It is important to inject com-      personalities, style or impatience, such that       there with that issue is an understanding of
be much more conscious of what is reason-         parative information into the discussion, but    he does not feel he must jump ship at the           the time commitment and responsibility that
able and doable in today’s environment. The       no one has managed to come up with a good        first sign of trouble, but not so much protec-       board membership entails and the adequacy
practice has become much more compli-             answer as to how to determine the right          tion that he cannot be fired without paying          and extent of directors and officers liability
cated.                                            comparisons. There is a range, and almost        him an amount out of all proportion to his          insurance. Today people are much more
                                                  everyone knows at what point that range          position and responsibilities. The life             conscious of the risks involved in taking on
Editor: What about the responsibilities of        begins to become out of line, whether too        expectancy of a CEO these days is some-             these positions than they were in the past.
members of the governing board’s com-             high or too low. It is determining what is       where between three and a half and five              As a result, I think smaller companies are
pensation committee in a public com-              fair and market-based in the middle of the       years, on the average, and it takes time to         finding it more difficult to recruit the people
pany? What are the challenges here?               range that is the challenge. If the committee    land a new job. Accordingly, some security          they want for their governing boards.


                        Please email the interviewee at msirkin@proskauer.com with questions about this interview.

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:2
posted:10/4/2011
language:English
pages:1