Using a tool called "tally sheets," boards are discovering how much their CEOs are really making. The numbers are shocking directors — and changing pay practices.
When board members at Conseco Co. sat down last May to draw up a new contract for William S. Kirsch, their fifth chief executive in almost five years, they wanted to avoid mistakes of the past. Investors had long criticized the Carmel, Ind., insurance-holding concern for specializing in big executive paydays.
"The history of this company was excessive pay not based on performance," says Michael Shannon, chairman of the board's compensation committee.
This time around, Conseco directors may have accomplished their goal. And they did it with help from a simple tool that's increasingly popular among corporate boards concerned about out-of-control executive pay: a tally sheet.
Nicknamed "holy cow" sheets for the way they often expose the immense worth of current and potential payouts, tally sheets can help a board gain a fuller picture of a chief's entire compensation. For years, board pay panels have been faulted for failing to do the math when it comes to grasping the true value — and possible future cost — of CEO packages. But tally sheets make it easier to keep score, allowing boards to project payouts under different scenarios for everything from salary and perquisites to equity grants, deferred compensation, severance and supplemental pensions.
The use of tally sheets — and their impact — could be significant, especially once the Securities and Exchange Commission adopts sweeping proposed rules to widen what companies must divulge about management compensation. Already, certain boards are sharing portions of their tally sheets with investors by enhancing pay disclosures. Some others are using them to justify curbing certain compensation practices. The hottest targets: pensions, severance, perks and long-term awards without tough performance hurdles.
"Tally sheets have the ability to impact both the form and the level of the CEO's compensation" once directors realize how tiny a portion of the rewards typically depend on corporate performance, says Jannice Koors, a managing director at New York-based Pearl Meyer & Partners, the pay consultancy that helped Conseco put together the Kirsch tally sheet.
Tally, Ha
To be sure, there are plenty of skeptics who say it's wishful thinking to believe that tally-sheet revelations can stem the tide of rising CEO pay. "More disclosure won't drive total CEO pay levels down," says Patrick McGurn, an executive vice president of proxy advisers Institutional Shareholder Services in Rockville, Md. "It will just change the currency used."
Certainly, tally sheets had no measurable impact on the overall numbers in the annual CEO compensation survey by Mercer Human Resource Consulting for The Wall Street Journal. The median salary and bonus for chief executives last year increased 7.1% to $2,408,665, according to a proxy analysis of 350 major U.S. corporations by Mercer. The climb in cash compensation compares with a record 14.5% surge a year earlier to a median of $2,470,600. (The 2004 figures come from a somewhat different sample of 350 companies. While the median dollar figures are based on all companies in the sample for a given year, the percentage changes are based only on companies and CEOs that remained in the sample from one year to the next.)
Median base bay for CEOs in 2005 rose 3.6%, compared with 3.7% in 2004. Raises for the highest bosses matched those granted to their white-collar lieutenants. Paychecks of nonunion salaried employees pulled ahead 3.6% following a year in which they only rose 3.4%, the slowest pace since the 1989 debut of the study by New York-based Mercer. (Overall U.S. wages and benefits increased 3.2% last year, down from 3.5% in 2004.)
In the wake of a 13% improvement in company profits, surveyed chiefs saw their bonuses expand 8.4% to a median of $1,437,150. Bonuses escalated 20% to a median of $1.5 million the previous year.
Total direct compensation for chiefs grew 15.8% to a median of $6,049,504, Mercer found. Besides salaries and bonuses, this figure covers the value of restricted stock at the time it was granted, gains from stock-option exercises and other long-term incentive payouts. In 2004, the median leaped 40.9% to $5,920,388, the biggest increase in the study's history, largely due to huge gains in corporate profits and option exercises.
Total direct compensation for those running the 10 businesses with the highest shareholder returns zoomed 51.3% to $10,229,218 according to Mercer. The heads of the 10 concerns with the poorest returns experienced a harsh 72.5% drop to $1,551,495. The median total shareholder return, which equals the stock-price change plus reinvested dividends, was 6.8% for surveyed companies.
Overall, CEOs reaped a median realized gain of $3,493,440 from option exercises, compared with $3,229,072 in 2004. Capital One Financial Corp. leader Richard D. Fairbank snared an especially sizable sum: $249.3 million from exercising options to buy about 3.6 million shares.
Bigger bucks may lie ahead. Many CEOs remain perched atop piles of unexercised options. Median unrealized gains vested and unvested options of CEOs in the survey totaled $10,202,971 last year, compared with $11.8 million in 2004. The 2.5 million options Oracle Corp. bestowed on Larry Ellison, its billionaire chief and co-founder, pushed his total to 70.1 million options, valued at $474.47 million when Oracle's fiscal year ended last May 31.
Nevertheless, it shouldn't be overlooked that fewer companies awarded options last year. Of the 350 businesses surveyed, leaders of 265 companies got options, down from 273 in 2004. And 192 CEOs cashed in a median of 149,046 options, down from 197 who exercised a median of 140,442 options in 2004.
One reason for the decline: new accounting rules that require employers to count stock options as expenses in their annual financial results.
But in some cases, there was another reason as well: tally sheets. For example, while Aetna Inc. last year awarded options to its then-CEO John W. Rowe, his successor, Ronald Williams, received no options — thanks in part to the board's use of a tally sheet. According to Aetna's latest proxy, directors of the Hartford, Conn., health-benefits concern based their decision in part on a review of tally sheets and "evolving practices" at other major public corporations.
Similarly, Michel Mayer, chief executive of Freescale Semiconductor Inc., is likely to receive fewer options this year than the 254,295 awarded to him last year, partly because the Austin, Texas, chip maker intends to also give him restricted stock units tied to performance. The shift marks the first time that equity granted to Mr. Mayer will come with strings attached since Freescale's 2004 spinoff from Motorola Inc., and it resulted from a review of detailed tally sheets "for all the top officers," says B. Kenneth West, chairman of the Freescale board pay panel.
Yet Mr. West remains cautious about tally sheets' overall impact. "They give you a better perspective," he says. "But I can't say that pay ratcheting is going to stop as a result."
Whatever skeptics and the overall numbers from this year's survey say about how much CEOs are paid, it's clear that tally sheets have the potential to at least change how they earn their pay.
This much was evident in the latest deal that Conseco's directors negotiated with Mr. Kirsch.
"We all agreed it should not be 'show-up' pay," recalls Mr. Shannon, referring to the way some corporate boards enrich chiefs just for coming to work. Mr. Shannon was part of the board that took over at Conseco after the company emerged in September 2003 from nine months in bankruptcy protection. Except for the CEO, every board member was new.
Mr. Kirsch, who declined to comment for this article, took the helm in August 2004 when the chief at that time suddenly retired. The former Conseco general counsel and executive vice president had been negotiating for the job of president, and he went to work as CEO under those pay terms — with an agreement that his pay package would be brought up to CEO levels in 2005.
Last summer, the board gave Mr. Kirsch a nearly 22% raise in salary, to $975,000 from $800,000. His maximum potential bonus jumped to about $2.4 million from $1.6 million a year, though his actual bonus last year was $1.47 million.
But directors rejected Mr. Kirsch's request for a supplemental executive retirement pension, or SERP. Such pensions usually are based on a CEO's compensation in the last few years of his or her career, and so can be hugely expensive — a point that Conseco board members recognized thanks to the tally sheet. The sheet suggested that a typical SERP could cost the company more than $17 million over Mr. Kirsch's lifetime.
Something else the tally sheet showed, however, was that SERPs were widely used by Conseco's rivals — and that without a supplemental pension, Mr. Kirsch's proposed overall package was modest compared with those of other insurance industry chiefs. So, the board instead agreed to consider a deferred-compensation plan this year that would be tied to performance measures, such as return on equity.
Pfizer Adds It Up
Fifty of the 350 corporations tracked by Mercer disclosed tally-sheet usage in their latest proxy statements, with several spelling out the CEO's hefty accumulated wealth and likely future riches for the first time. Pfizer Inc., the world's biggest drug maker, supplied among the fullest disclosures. Its proxy says that CEO Henry A. McKinnell could have pocketed a lump sum of $83 million if he retired last Dec. 31 — and will receive $6.5 million a year for life when he does. (The 63-year-old executive will retire in 2008.)
The annual figure represents the biggest pension benefit for a chief executive of any company in Standard & Poor's 500-stock index, reports Corporate Library, a research firm in Portland, Maine. Last fall, Pfizer withdrew earnings projections for 2006 and 2007. Its share price hit an eight-year low in December.
Acknowledging the recent decline in shareholder value, Pfizer directors told investors they're tightening links between pay and performance. Among the moves cited in the proxy: For benefits accrued since Jan. 1, 2006, they will seek stockholder approval before paying an annual pension that exceeds the executive's average salary and bonus in the five years in which they were the highest.
Thanks in part to their tally sheet, Pfizer directors also decided to limit severance in the event of a takeover, according to Margaret Foran, senior vice president for corporate governance. But even with those modest changes, Mr. McKinnell would walk away with nearly $46.6 million if Pfizer were acquired, the proxy says.
Controlling astronomical exit payments can be a key concern for companies under financial pressure. Take Symbol Technologies Inc., a Holtsville, N.Y., producer of bar-code readers and handheld computers that has struggled to recover from alleged accounting fraud and several years of restated earnings. Eight former company officials have been indicted on charges of accounting fraud. The board turned to a tally sheet last year to help it replace supplemental pensions with a deferred-compensation program in which corporate contributions depend on the company's earnings.
"I wouldn't accept a SERP," says Salvatore Iannuzzi, a former outside director who became Symbol's permanent chief executive in January 2006. The discarded pension plan "wasn't predicated on performance," Mr. Iannuzzi says. "If you were here and fogged the mirror, you were entitled to it."
At certain companies, tally sheets are helping merely to chip away at once-hidden executive perks with relatively little value. Exxon Mobil Corp.'s proxy, to be issued later this month, will show the company has stopped paying club dues for the top brass, people close to the situation report. Directors scrutinized tally sheets from shareholders' perspective and concluded it looked stupid to pay such costs when senior executives make enough money to foot those bills themselves, one such individual says.
Exxon Mobil covered $46,223 of club memberships in 2004 for Lee Raymond, who led the Irving, Texas, oil giant until he retired last Dec. 31. The 2005 proxy didn't describe dues paid for his successor, Rex Tillerson. An Exxon Mobil spokesman declines to comment.
Becton, Dickinson & Co. is shedding financial-planning services for its chief executive, Edward J. Ludwig. But the Franklin Lakes, N.J., medical technology concern partly made up the $9,000 canceled benefit by raising Mr. Ludwig's salary $4,000 to $994,000.
"Paying any money for CEO perks not related to specific job performance is crazy," says Mark M. Reilly, a partner at 3C Compensation Consulting Consortium in Chicago.
"No good deed goes unpunished," retorts John R. Considine, chief financial officer at Becton Dickinson.
More Activism
The use of tally sheets to enhance transparency for investors has failed to appease shareholder activists, however.
"No one is getting a pass for disclosing bad behavior voluntarily," says Brandon Rees, assistant director of the AFL-CIO's Office of Investment. The Washington-based labor federation submitted a Pfizer shareholder resolution seeking additional pension curbs. The SEC accepted Pfizer management's request to exclude the ballot measure from the proxy.
Nevertheless, union members plan to attend the drug maker's April 27 annual meeting, where they will demand "that Mr. McKinnell give back half his pension benefit," Mr. Rees says. Performance "has been horrible under his tenure."
Pfizer directors awarded their CEO retirement benefits "on the basis of many years of service to the company, including years in which the company significantly outperformed the market and its peers," replies Dana Mead, chairman of the compensation committee, in a statement.
Investors have submitted 143 executive-pay measures so far this year, says Carol Bowie, director of ISS's governance research service. Increasingly, disgruntled holders also target directors responsible for excessive rewards. ISS recommended that clients withhold support for the re-election of pay panel members at 77 companies last year, up from 24 in 2004.
The pending SEC overhaul of pay disclosure, expected to take effect in 2007, would force businesses to provide a total compensation figure for top executives along with extensive details about their perks, projected retirement payments, severance and deferred compensation.
The new rules will turn up the heat over stratospheric pay. "It will be easier for shareholders to ask chief executives, 'Why do you need so much?' " says Cornish Hitchcock, outside counsel for Amalgamated Bank's activist Long View Collective Investment Fund in New York.
On the other hand, heightened disclosure of king-size packages could intensify corporate kings' clamor for the same sweet deals. When CEOs discover the bigger numbers, they "may then say, 'Me, too,' " frets Jesse Brill, chairman of CompensationStandards.com, a board advisory Web site. He favors requiring directors to inform investors about steps they take to fix excessive pay elements. Otherwise, he says, "we may well have more ratcheting and further loss of public trust."
—Ms. Lublin, the management news editor for The Wall Street Journal in New York, served as contributing editor for this report.
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A healthy increase in corporate profits amid a somewhat stronger stock market swelled company captains' trove from stock-option exercises during 2005.
Their expanded riches show up in the annual compensation survey that Mercer Human Resource Consulting conducts for The Wall Street Journal.
The New York firm keeps tabs on CEO rewards from exercising options plus other long-term incentive payouts, salary, bonuses and the value of restricted-stock grants. This total direct compensation climbed 15.8% to $6,049,504.
The median value of shares held by the No. 1 bosses at the end of their employers' latest fiscal years was $11.19 million, down slightly from $11.34 million the year before. The median total shareholder return, or TSR, equaled 6.8%, compared with 17.4% in 2004.
According to the Mercer study, 192 company chiefs cashed in options during 2005 for a median gain of $3,493,440. That compares with the 197 doing so the previous year for a median gain of $3,229,072.
Here's a lineup of the big-business leaders who racked up the highest scores in the 2005 pay sweepstakes. All but one landed on past scoreboards. Two of these highest-paid CEOs will encounter investor resolutions limiting executive pay this year, reports Institutional Shareholder Services in Washington.
The upward trajectory in cash-compensation growth for big-business leaders slowed last year. The trend became clear during a review of proxy statements from 350 major U.S. corporations by Mercer Human Resource Consulting for The Wall Street Journal. Salaries and bonuses of surveyed chief executives rose 7.1% after zooming 14.5% in 2004 and advancing 7.2% in 2003. The latest increase exceeded the 3.6% climb in pay for white-collar staffers. In the New York firm’s analysis, 192 chieftains exercised stock options during 2005 for a median gain of $3,493,440, compared with the 197 doing so the prior year for a median gain of $3,229,072. Median total direct compensation—which covers salary, bonuses, gains from option exercises, other long-term incentive payouts and the value of restricted shares at the time of grant— pulled ahead 15.8% to $6,049,504. That’s a more moderate pace than the sizzling 40.9% spurt to about $5.9 million in 2004. The earlier study reflects a slightly different sample.
Take the money and run, or take the money and stay?
It's a choice you may well face at one point in your career: Whether to jump to another company that's trying to seduce you with a fatter paycheck and better perks, or use the job offer as leverage to push your current boss into producing a package that would make it worthwhile to stay.
For most employees, this sounds like a dream scenario, allowing them for once to turn the tables on an employer and come out ahead. But it's a path fraught with risks, and employees looking to play the make-me-an-offer-I-can't-refuse game must tread carefully.
"It can be done," but "it is sort of a dicey and delicate thing to deal with," says Bill Coleman, senior vice president of compensation at Salary.com, a Needham, Mass.,-based online provider of pay information. "It's the equivalent of holding a gun to your employer's head," adds Steve Hall, director of professional recruiting at FGP International, a staffing and executive-search agency in Greenville, S.C.
The Worst Case
Recruiters caution against doing it without thinking about consequences first: Don't say you're thinking about leaving unless you mean it, because your manager may call your bluff. "Sometimes when you go to your boss and tell them you got a better offer, they wish you luck," says Mr. Coleman.
If you're prepared to proceed, job experts recommend that you be as specific as possible with your current boss on what it would take you to stay. Robin Ryan, a career coach based in Newcastle, Wash., says it's important to do this because in these types of negotiations time is often an issue -- the outside company that is trying to lure you wants to hear back soon, and your current boss will need at least some time to see if the offer can be matched. "There's usually a time crunch," says Ms. Ryan, so "phrase it in a way that states what you want" -- for example, saying "for me to stay here I need a $12,000 raise or that title that I've been wanting."
For employees who want to stay with their current employer, provided that a competing offer can be matched or even topped, career experts recommend giving their supervisors ammunition they can use to help sell an improved compensation package to their higher-ups. Ms. Ryan recommends that employees spell out the value they add to their organization and why it would make sense to keep them, even if it takes a raise or promotion. Tell your manager, "These are the three things I'm going to work on the next six months that are going to add to the bottom line," she says.
Ms. Ryan recalls a woman working as an office manager for a hospital clinic who had an outside offer and wanted to see if her boss would match it. "She told me, 'I really would like to stay,' " Ms. Ryan says. "I told her, 'When you talk to the person you must tell them why you're worth it.' " The woman took Ms. Ryan's advice, writing a letter that highlighted her contributions to the company, and she ended up keeping her job after her employer countered by offering a salary increase.
Getting the Boss on Board
It's important to justify why you're seeking a counteroffer -- and get your boss on board with that rationale -- because even if one is made and you stay, you could still be viewed with suspicion. Your managers and fellow employees may question your loyalty to the company.
"Companies don't like to be fired, they like to do the firing," says Mr. Hall, FGP's recruiting director. "Anytime you show up late in the morning, anytime you're not viewed as a team player, there's tremendous resentment by the boss," Mr. Hall says. Perks you negotiate as part of the counteroffer could make co-workers jealous. "If you're now getting Friday afternoons off, you're going to be resented by your teammates," he says.
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If a counteroffer does surface, employees should think before taking it. It's natural to view salary as the ultimate reason for employment, but there are many reasons aside from pay that make employees think about leaving a company. So even if your current boss matches that rival offer, it's wise to think about the other, less tangible qualities that make one employer more attractive than the other.
Kimberly Walker, division director at the Chicago office of Creative Group, a staffing service owned by Robert Half International Inc., says employees should review all the reasons that originally made them consider leaving before accepting a counteroffer. "It's not always compensation," she says. "Is that really the reason why you're unhappy? It might be that there's not more of a challenge from a work perspective. Counteroffers don't always address all of the issues that prompted a person to seek other employment in the first place."
Mixed Message
Sometimes a counteroffer sends a different message than the one intended. Mr. Coleman, at Salary.com, recalls an incident that occurred several years ago when he was working at another company. "I had had a performance review and was told I was doing very well, everything positive, 'you're a keeper,' that kind of thing. I questioned my salary, and I was told budgets were tight. Completely coincidentally, I got a call from a recruiter with an opportunity. I went on the interview and got an offer that was effectively a 35% salary increase without negotiating," Mr. Coleman says. "I went back and gave my notice. Within half an hour the salary was matched." Mr. Coleman was taken aback at his employer's abrupt about-face just weeks after being told that tight budgets precluded a higher salary. "I questioned the previous conversations," says Mr. Coleman. "I felt like I was being cheated and lied to." So he left.
Career experts recommend that employees put their managers on notice that they're unhappy with their jobs before looking for outside employment and seeking a counteroffer. Mr. Hall recommends sitting down with your boss and telling him or her that you feel undervalued, explain why and ask if there's anything that can be done.
Don't Burn Bridges
It's also important not to burn bridges. If you take a counteroffer from your current employer, the other company that was recruiting you may feel it was used as a negotiating pawn. Reputations can be lost in these types of situations if officials of the other company feel you weren't honest with them, recruiters warn.
When negotiating a counteroffer, many employees will try to milk the situation for all it's worth. But that, too, can be a mistake. The tables could turn again, and someday, if the job market cools, you could find yourself at your boss's mercy -- and he or she may remember you played hardball earlier.
"It's a tough balance to achieve," says Mr. Coleman, since people want to be paid what they're worth. But he cautions against asking for so much that you price yourself out of the market. If your boss agrees today, your high pay may be held against you when raises or bonuses are parceled out in the future -- or even when it's decided who will lose their jobs in a round of layoffs. Over time, says Mr. Coleman, "companies generally tend to take outliers and put them back in line."
--Mr. Ceron is a reporter for Dow Jones Newswires in Jersey City, N.J.
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Before going public in January with a litany of corporate-governance concerns, Integral Systems Inc. director Bonnie Wachtel sought advice from friends and colleagues about a hypothetical situation that mirrored her own.
All, save one, counseled that the hypothetical director stay mum.
Ignoring the majority view, Ms. Wachtel didn't just inform her fellow Integral directors that she wouldn't stand for re-election. She left behind a scathing paper trail for investors: copies of letters she wrote to the board in which her criticisms about Integral's executive-compensation policy and other governance matters are detailed. The letters were included in a Jan. 10 filing by the company with the Securities and Exchange Commission.
"If directors care about bringing shareholders into the process, they have to know when there is a disagreement on the board," says Ms. Wachtel, CEO of Wachtel & Co., a family run investment-banking boutique in Washington, D.C. "I'm very glad I did it," she adds. Wachtel & Co. took Integral public nearly two decades ago and still holds a stake of less than 1%, now valued at more than $1 million.
Ms. Wachtel isn't the only director these days breaching the traditional boardroom wall of silence. In 2004, a new law required companies to disclose the circumstances -- and the resignation letters -- when a director resigns or declines to stand for re-election because of a disagreement. Since then, stinging letters have been made public from resigning directors at such companies as Santa Ana, Calif.-based Corinthian Colleges Inc., which operates a chain of for-profit schools, Cyberonics, a Houston medical-device concern, and M-Wave Inc., a Bensenville, Ill., distributor of electronic components.
Issues surrounding pay practices were a common concern in these missives, among other governance issues.
'Overly Deferential'
Ms. Wachtel's concerns about Integral, a Lanham, Md., maker of ground satellite systems, were summed up in four letters that she wrote to the board, which were included as exhibits in the SEC filing by Integral. In the first letter, dated Jan. 9, she declared her intention not to stand for re-election, "based on a variety of financial and corporate governance concerns." In the same letter, she also attributed some of Integral's problems to "an overly deferential, pro-management board."
Among many critical remarks in an undated draft letter to the board attached to the filing, she lodged specific complaints about the way the 2005 compensation plan was devised. "I find it rather strange," she wrote, "when a company's bonus plan is announced at a management retreat (September 14) six weeks before it's shown to the board." Ms. Wachtel, who was a member of the board compensation committee, said in the letter that she received her copy of the bonus plan on Oct. 28.
The committee, she wrote, also was not given an opportunity to fully consider management's proposal to replace stock options with higher bonuses. "If stock options must go," she wrote, "I would have preferred that the committee consider other alternatives than just increasing the bonus plan."
In a separate recent email to The Wall Street Journal, she asserted that the compensation committee was not involved in designing management's 2005 bonus plan, only in approving it.
Through a spokeswoman, Integral executives and board members declined to comment. In a January SEC filing attached to Ms. Wachtel's correspondence and announcing her plans, however, the company said it "disagrees with the contents of Ms. Wachtel's written correspondence."
In her Jan. 9 letter, Ms. Wachtel cited another reason for her leaving the board: misdemeanor sex charges brought last year against Steven R. Chamberlain, Integral's chairman, CEO and co-founder. The charges, which involve a minor and have since been superseded by two felony sex charges, were filed in June against Mr. Chamberlain in Maryland's Howard County District Court. In a February news release, Integral said that Mr. Chamberlain "maintains his innocence and has stated that he will vigorously fight the charges." Neither Mr. Chamberlain nor his lawyer returned calls seeking comment.
In the Jan. 9 letter, Ms. Wachtel asserted that Integral's senior management initially withheld information about the charges from the board. In her email to The Wall Street Journal, she added that although the criminal matter now overshadows the compensation issues at Integral, both reflect the same attitude at the company toward governance, which, in her opinion, "should be a serious shareholder concern."
Since Ms. Wachtel's letters were made public, Mellon HBV Alternative Strategies LLC, a New York-based hedge fund, purchased 1.3 million Integral shares, a stake of nearly 12%, and has subsequently pushed for a sale of the company -- something that Ms. Wachtel also advocated in her correspondence filed with the SEC. Ms. Wachtel says that Integral initially opposed her proposal.
Considering Options
But lately the company appears to have dropped its opposition. Integral said recently that by the time of its annual meeting this Wednesday, it would announce the hiring of an investment bank to consider its "strategic options to maximize shareholder value."
Mickey Harley, chief executive and chief investment officer of the Mellon fund, says he had been eyeing Integral, believing its shares were undervalued, when Ms. Wachtel's letters helped shine a light on the board "dysfunction." Says Mr. Harley, "I think she felt something very egregious was going on and felt by going public she was doing her job."
Before the new federal disclosure rules went into effect in late summer 2004, companies were required to announce director departures after a dispute only if the director explicitly requested that his or her resignation letter be made public. Indeed, investors didn't immediately learn the back story when Tenet Healthcare Corp. blandly announced in April 2004 that its compensation committee chairman had resigned.
Later that month, the former Tenet director, Robert C. Nakasone, went public with his resignation letter, providing a copy to The Wall Street Journal. Among other things, Mr. Nakasone's letter zeroed in on Tenet's 2004 executive bonus program, which he said would reward the CEO without "any improvement in results." The bonus plan was an example of "deep-rooted feelings of entitlement," at the company, the letter said.
Mr. Nakasone, a former Toys R Us CEO, now runs an investment and consulting boutique in Santa Barbara, Calif. He declined to comment for this article.
Tenet denied the allegations in the letter at the time, and declined to comment for this article.
There's no way to know how many tell-all letters remained private before the new rules went into effect. Experts, however, doubt there were many, because boards have historically been pictures of consensus and collegiality.
Even today, with increased scrutiny of compensation practices by regulators, investors and plaintiffs' lawyers, "most [compensation committee members] seek to make changes, if they are disgruntled, from within," says John England, a managing principal at Towers Perrin, a Stamford, Conn., pay consultant. "If they're on the compensation committee, they know they are in the spotlight as much as any directors, maybe more." Despite recent public examples of discord, "there are lots of examples where directors seek to do the right thing and want to make sure the company's programs are structured appropriately," he says.
Some critics challenge the notion that anything much has changed. Directors, the critics say, are still reluctant to speak their minds as much as they should, as evidenced by increasingly escalating pay packages for top executives.
The pervading philosophy of collegiality at all costs is seen as one culprit -- compounded by steady, and often handsome, paychecks for the directors themselves.
That's the view of Ahmed Hussein, a dissident director and second-largest shareholder at Irvine, Calif., software maker Quality Systems Inc. After he wasn't renominated, Mr. Hussein waged a proxy contest last year, using the campaign as a stage from which to protest a range of issues, including hefty pay raises for directors. Mr. Hussein and one of his nominees were elected to the board; a third director on his slate wasn't elected, prompting Mr. Hussein to contest the results. An Orange County, Calif., superior-court judge upheld the validity of the vote.
"It's camaraderie," Mr. Hussein says, explaining why boards generally don't challenge management enough on compensation or other issues. "We sit in the same boardroom, we're comrades," he says, describing interactions on a typical board. "When you sit there, you see management, you don't see the shareholders, and management invites you to dinner. Most of the time you want to take care of management."
Quality Systems's founder, chairman and largest shareholder, Sheldon Razin, says of Mr. Hussein: "He's been extremely disruptive and nonconstructive. He's the one most lacking in corporate governance. He's cost the company and shareholders millions of dollars in outside legal costs and board time and shareholders have not really benefited from Ahmed Hussein and his platform."
Avoiding Dissent
There is criticism of both collegiality and compensation practices in Michael P. Berry's letter of resignation from the board of Corinthian Colleges, dated Sept. 13, 2005, and filed with the SEC nine days later, on Sept. 22. Mr. Berry charged that the company's disappointing performance didn't justify executive compensation levels, and he described the atmosphere in which the board works as one in which directors need to appear to be unified and avoid dissent.
Directors were "instructed upon selection that consensus is how the board operates," Mr. Berry wrote in his letter. But instead of reaching a true consensus, the dynamics of board meetings amounted to "papering over real differences." Mr. Berry's letter painted a picture of meetings in which, even behind closed doors, debate was stifled and there was "no confronting the brutal facts."
Corinthian and its board declined to comment for this article. But in its September filing with the SEC containing Mr. Berry's letter, Corinthian prefaces Mr. Berry's remarks by saying it "has a strong, independent board comprised of talented, diverse individuals, who bring insightful perspective to the board."
Corinthian also says in its statement that while it "shares Mr. Berry's disappointment with its recent operating results, the company is working diligently to implement its previously announced plans to improve those results."
For departing directors, it's often a tricky decision whether to issue a formal protest letter. "If you're leaving just to act pouty, I'm not sure what that really accomplishes," says Alan Johnson, managing director of Johnson Associates, a New York compensation-consulting firm. But if there's an ethical issue or significant concerns about how management is behaving, it's a different story, he suggests. "It certainly would behoove you to resign and send a message if you don't think the shareholders are being properly taken care of," he says.
As for Ms. Wachtel, she counsels: "The best antidote for all corporate-governance problems, including compensation, is adequate shareholder representation on boards. No amount of consultants' reports or peer review studies can substitute for directors who have skin in the game."
--Ms. Plitch is a special writer for Dow Jones Newswires in Jersey City, N.J.
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