Wednesday, November 23, 2005

When Nobody Likes Your Pay Plan

Imagine submitting a compensation proposal and having the following groups express vehement opposition to it: The United Auto Workers, United Steel Workers, a U.S. Government agency (The Pension Benefit Guaranty Corp.), bondholder Wilmington Trust, pension funds in the states of Mississippi and Oklahoma, another pension fund in The Netherlands, and an investment fund manager in Austria.

This is what Delphi Corp. accomplished with their executive compensation proposal. Apparently the rank-and-file employees at Delphi are terribly overpaid, so they will need to take a reduction from a current average wage of $26 to about $12.50 per hour. The executives and managers at Delphi, as the CEO describes the situation, are terribly underpaid and need approximately $500 million, including 10% of the equity in the post-bankruptcy company, to be retained and motivated.

I forgot to mention that aspect of the story. Delphi filed for bankruptcy, and the executive and management team that presided over that failure - including accounting fraud and a $400 million underfunding of the employee pension plan - is the team that needs to be retained and motivated.

On 5 January, a U.S. Bankruptcy Court Judge will hear the proposal.

The New Share Plan Metrics

Until recently, the ubiquitous use of stock options made competitive comparisons a relatively easy process. Now, significant changes in plan design - triggered by new accounting rules, the corporate governance climate, and emerging "standards" from a variety of constituencies –render the old metrics inadequate. Overhang, run rate, Black-Scholes values, and other measures give an inaccurate view of pay levels and value transfer, leading to misguided decisions.

As companies assess alternative forms of share-based awards – performance-based options, stock-settled SARs, restricted stock and RSUs, performance shares – as well as changes in the mix between equity and cash, the decision process requires assumptions about the "value" and "cost" of each type of award. Firms attempting to understand their competitive position using survey data and their compliance with investor requirements face new challenges given the outdated methodologies being used. This session explains the emerging metrics and techniques being used by leading companies in understanding the value and cost of share-based payments in this new environment and presents a model for navigating through the complex decision process. The presentation includes a preview of new standards in 2006 from organizations including the SEC, ISS, S&P, ABI and others.

Attend a Web seminar on this topic, presented by Global Equity Organization, on 11 January 2006.