Today is the deadline for submitting comments on a host of changes proposed by the SEC regarding executive compensation, proxy disclosure, shareholder rights and compensation consultants. See the government�s link here:
http://sec.gov/rules/proposed/2009/33-9052.pdf

Of particular concern is potential for conflicts of interest where the same or affiliated consultant performs duties for management (i.e. consulting on benefits, insurance, etc.) and for the Board of Directors (i.e. consulting on management�s compensation). A 2007 House of Representatives Committee reported that compensation consultants can earn fees almost 11 times more for providing �other services� than they were paid for providing executive compensation advice. See report here:
http://oversight.house.gov/documents/20071205100928.pdf
The report goes on to purport that there appears to be a correlation between the extent of a consultant�s dual role in a company and the level of CEO pay.

Many of the larger firms that do offer �other services� besides executive compensation consulting have stated that they have built-in preventative measures that limit the potential for any conflict to occur. However, is the perception of a conflict enough to cause concern? The proposed SEC changes would require companies that hire the same or affiliated consultants to perform both functions to disclose the work performed and the fees paid in those instances.

Please tell us what you think about this issue and offer your comments.

During this global economic crisis, property and casualty insurers must remain focused and disciplined in their underwriting and risk management practices. There should be a strong link between pay and the desired objectives of the company to keep executives focused. Despite a 96% drop in net income, U.S. property and casualty insurers remain well-capitalized according to research by the Property Casualty Insurers Association of America. Link to PCI site here.

Experience tells us that property and casualty insurers typically have been more conservative in underwriting and investing than their banking counterparts and this disciplined approach to risk-taking should bode well for the industry. However, in order to maintain that discipline, insurers must design meaningful and appropriate compensation programs to drive their businesses forward. The experienced professionals at Compensation Resources, Inc. can assist compensation committees and HR directors in setting appropriate performance goals to align the interests of the leadership team with company goals. Please call us at 201-934-0505 if you have any questions regarding executive or employee focus, motivation or retention needs.

Yes, public companies disclose this in the Proxy Statements. It is called a Definitive Proxy Statement Form 14A. You can go to www.sec.gov to find these filings. Here is a link to one that was released today.


Definitive Proxy Statement Form 14A

Assuming that most of the executives would have employment agreements or at least, on-competition contracts, most of them include provisions that prohibit working, consulting and advisory role, owning <5% or more of investments in any competitive organization. It usually indicates that any external activities can not detract from their corporate responsibilities. Other prohibitions and ethics policies should preclude any related issues. Given the recent outcry on executive excesses and the need for transparency, we expect there may be new and more encompassing legislation forthcoming.

Compensation plans for consulting companies and law firms can take a variety of forms. For the most part, a base salary component is provided to the principals and partners of these firms.

Bonuses/incentives are often provided to reward these key people for the business development activities they generate that contribute to the growth and success of the firms. The manner in which these bonuses/incentives are provided may vary based on the size of the organization, the contributions of each principal/partner, the relative financial health of the organization at year-end, the level of subjectivity or objectivity desired for determination of awards, etc.

In consulting firms, incentive plans are often implemented to reward new business, and can be paid in a manner that recognizes the size of the project relative to its professional fees. Some firms seeking to encourage new client business over existing clients provide for a greater reward for new business development, but these pay plans are often subject to the firm's business strategy. Where existing clients are valued the same as new clients, little if no differentiation should be made between the size of the rewards for either type of business brought in.

In addition, distribution of profits is a common compensation element among partners, particularly in law firms. A decision is made beforehand relative to the percentage share each partner will receive, based on criteria such as ownership interest, historical and projected level business development and billables. etc. However, this system can become complex as the size of the firm increases.

Another form of compensation utilized by these types of organizations includes a form of long-term incentive that provides phantom equity to key individuals of the organization. A plan that provides for phantom shares or units can be implemented to reward key players of the firm, with the level of achievement of performance metrics driving the value (up or down) of the shares/units. Performance metrics can be tied to financial and/or operational measures.