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 firstname.lastname@example.org with questions about this interview.