Friday, March 07, 2008

Those Darn Compensation Consultants

"Mortgage mess CEOs defend pay" -
"Countrywide's Mozilo resisted pay cuts" -
"Wall Street Executives Defend Pay at House Hearing" -

In all of the media coverage today, perhaps the most interesting tidbit was not what was said in the hearings but what was learned from some email messages in the course of the investigation. Beyond the left-vs.-right debate, the accusations and justifications, and the election-year posturing, there's this:

"The report says two compensation consultants hired in recent years urged the board to cut back on certain aspects of Mr. Mozilo's compensation. The first...advised Countrywide in 2004 when it was discussing an extension of Mr. Mozilo's contract.

"A second 2006 recommended reductions in Mr. Mozilo's compensation, the report says. After the board's compensation committee proposed making those cuts, the report says, Countrywide management hired another consulting firm, Towers Perrin, to review the board's proposal. Though the firm was being paid by Countrywide, Mr. Mozilo regarded the Towers Perrin his own adviser, emails reviewed by the committee staff suggest.

"'The board made a number of revisions to accommodate Mr. Mozilo and (the consultant)," the report says. Among other things, the board put larger companies into the peer group used to gauge Mr. Mozilo's pay and gave him a $10 million bonus to stay on as CEO longer than planned.
The report cites an email (from the consultant) to Mr. Mozilo expressing disappointment that the board's final proposal "lowers your maximum opportunity significantly."

"According to the report, Mr. Mozilo replied: "At this stage in my life...this process is no longer about money but more about respect and acknowledgement of my accomplishments.... Boards have been placed under enormous pressure by the left wing antibusiness press and the envious leaders of unions...'."


The consultant expressed "disappointment" at the Board's actions. Wow.

(There was a fourth consulting firm involved as Countrywide's consultant to the Board Committee which is mentioned in their most recent proxy statement.)

"Lawmakers have argued that these consultants are merely getting paid to tell the board and CEO what it wants to hear." -

Apparently the Board was told by two, maybe three, different consultants that Mr. Mozilo's pay was too high. The Company even incurred the additional expense to file an amendment to its proxy statement with nice charts showing how Mr. Mozilo's pay was going to be lower under his new contract than under this old one.

Why does this really matter? Because a few companies with questionable pay practices end up in a Congressional hearing, which then leads to legislation regarding executive pay. That legislation is typically ill-conceived, fails to achieve its objective, and creates additional cost and constraints for all of the other companies. Like Sarbanes-Oxley, a law reacting to a few big companies' missteps penalizes thousands of smaller companies who have done nothing wrong. And that has a negative impact on American businesses, their employees, and our economy. I suppose in an election year I should claim that my position is "patriotic" but it's also one shared by many investors and even some other compensation consultants.

Who ever thought compensation consultants could have such an impact?

Disclosure: I am a shareholder of both Washington Mutual and Countrywide Financial but do not believe my financial interest in those companies influences the opinions expressed here. I do believe, however, that executive compensation practices directly impact shareholder value. I suppose I also should disclose that I once worked for Towers Perrin but never worked for the three other firms cited in the news today.

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