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Compensation panels face scrutiny on execs' pay

By Brendan Intindola

NEW YORK, July 25 (Reuters) - Stock investors -- still smarting over Enron, WorldCom and other recent corporate scandals -- have turned their attention to new targets: compensation committees and executive pay.

Critics say that while the corporate governance reforms so far have been good, they are only the first step and must be continued -- especially as the stock market improves and investors focus more on making money and less on cleaning up past problems.

Now that many new standards have been adopted or proposed, investors are demanding that boards' compensation committees be more than just independent. They also have to demand more for the often enormous amounts of money paid to top executives.

"You can still have three stuffed monkeys on the compensation committee, but as long as they are independent, it is OK," said Ralph Ward, author of "Saving the Corporate Board: Why Boards Fail and How to Fix Them," referring to new standards proposed by the New York Stock Exchange.

Unlike the new rules created by the Sarbanes-Oxley Act of 2002 that took aim at crooked accounting and biased Wall Street research, there are no new regulations covering executive pay.

Any efforts to rein in fat paychecks are strictly voluntary and mark a key test of boards' commitment to move away from excessive compensation, corporate governance experts said.

Shareholder activists and institutional investors -- whose portfolios suffered massive losses from the accounting scandals at Enron Corp. , WorldCom Inc. and others -- are closely watching compensation committees and the consultants who advise them on pay.

Ira Millstein, a senior partner with the New York law firm of Weil Gotshal & Manges LLP, said executive compensation is the top issue to watch when measuring the progress of corporate governance reform.

"The better the market gets, the more likely people are to fall asleep," the governance pioneer said in a conversation with Reuters, referring to the four-month climb in stock prices. "My greatest concern is we will have a full recovery, and to the extent that happens, we will have another crisis."

Total pay of CEOs at the largest U.S. companies fell 9 percent last year, according to an analysis of 2002 corporate compensation done by Reuters. The drop was almost entirely due to a decline in the value of options, which are notoriously difficult to value and can prove worthless if stocks drop.

Cash was king last year. Median salaries rose 6 percent, but the median bonus soared 21 percent.

Among the spectacular corporate failures of 2002, WorldCom's Bernard Ebbers is but one example of an executive well compensated for presiding over a company's slide.

Unfortunately for Ebbers, WorldCom has said it would cancel his $1.5 million-a-year severance payment and sell the ex-CEO's ranch in Canada in an attempt to collect on his debt of more than $400 million in personal loans.

SOME RULES MAY CURB PAY

Under higher standards of corporate governance proposed by the NYSE for its listed companies, compensation committees must be entirely composed of independent directors.

The NYSE's proposed regulations have yet to be approved by the U.S. Securities and Exchange Commission,

The compensation committee would have "sole authority to retain and terminate the consulting firm, including sole authority to approve the firm's fees and the retention terms," according to the Big Board's rule proposal.

This would prevent a CEO from hiring consultants who are advising on pay for top executives, which was largely standard practice.

Peter Clapman, chief counsel for corporate governance at TIAA-CREF, the teachers' pension fund that manages about $262 billion in assets, said the ability to retain and fire consultants is an important development.

"In the past, it was hard to see that (directors) were independently reviewing compensation from a shareholder perspective as opposed to a management perspective," he said.

He added that compensation committees "must reverse the ratcheting effect of seeking to position CEO compensation levels between the 50th and 75th percentiles -- a statistical impossibility if all (companies) do it.

"People are appreciating that there has been considerable unhappiness on the part of shareholders, and ... public perception of executive compensation is at a low ebb," he told Reuters. (Additional reporting by Jessica Hall)