Energy Biz - July/August 2008 - (Page 47) said, “Boards feel a lot of competitive pressure from investors to hire the best CEOs. From an investor perspective, a good CEO will help drive a stock’s value many times what his package costs.” Moreover, boards employ pay for performance as a default by linking a sizeable chunk of overall compensation to stock-based incentives, but bonuses are only a percentage of the base salary. Too many boards are not independent of the CEO, which can create problems, explained Paul Hodgson, the Camden, Maine-based senior research associate at the Corporate Library, a governance research firm. At many companies, “the board is either enthralled with the CEO or the CEO is in control,” he said. In those situations, when the utility’s performance and stock price falter, the CEO comes to the board, explains why targets weren’t hit and that the economic situation was challenging, and convinces the board to pay the bonus. An increasing number of energy companies are linking compensation to “earnings per share growth, return on equity and other customer satisfaction metrics,” explained Ira Kay, a New York-based executive compensation consultant with Watson Wyatt Worldwide. Kay said that boards are showing increased sensitivity in the energy sector to the full compensation package of CEOs, which includes “supplemental pensions, perquisites and severance. They have become the biggest irritants to shareholders.” Despite this crackdown, Kay declared that “boards haven’t been lax” about CEO compensation. Energy CEOs “have alternatives.” He continued, “They can go to private equity or another energy firm. They have labor market power, and boards are, in fact, concerned, if not alarmed, that if CEOs leave, they can cause considerable damage if the company’s market cap goes down.” Some boards have been stringent about cutting CEO compensation due to poor performance. “If the stock price goes from 30 to 15, compensation is going down. Make no mistake about it,” Crawford stated. Boards are increasingly holding CEOs accountable for the company’s performance value and adjusting the compensation package to ensure CEOs aren’t overpaid. Indeed, Peter Lupo, managing director of the New York office of Pearl Meyer & Partners, which specializes in executive compensation, has consulted for several utilities whose CEO’s compensation has been reduced. “When management doesn’t hit their financial goals, pay packages are cut down,” he said, though because of confidentiality agreements he can’t name names. Most of this reduced compensation takes the form of restricted stock options, which do not vest in two to www.energycentral.com e n e rgyb i z 47 http://www.energycentral.com
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