By:  Cydney Posner

Another front-page article today in the NYT series on executive pay from Gretchen Morgenson, this one focused on determining, and adjusting when necessary, the hurdles to achieving performance bonuses.

The article highlights problems with performance objectives that are too easily satisfied, noting in particular, bonus arrangements the express terms of which provide for substantial bonuses notwithstanding significant declines in performance. For example, the President of News Corp. is entitled to a bonus of $12.5 million if earnings rise by 15%; an earnings decline of 14% still translates to a $3.52 million bonus. The article also decries the vague laundry list descriptions of bonus targets contained in proxy statements, conceal from shareholders the specific objectives and preventing them from determining independently whether objectives have been satisfied. (The proxy rules do not require companies to disclose specific targets, and the proposed new executive comp rules do not seek to change that; however, there have apparently been a number of comments on the proposals requesting more specificity about bonus target measures.) The article also suggests that many of these performance targets allow compensation committees significant "flexibility" in calculating payouts, for example, permitting committees to exclude extraordinary events so that executives are paid based on performance of the core business. Sometimes, however, these measures are abused, allowing the creation of a bucket of exclusions that may not be extraordinary at all. The article also condemns companies that, when bonus criteria are not met, simply find another basis for making comparable payments, such as executive retention, disregarding regulatory filings reciting that executive bonuses will be paid only when earned. Some performance hurdles are so low, the article contends, they appear to quire only performance of basic operational tasks, such as compliance with laws, that should not merit bonus pay.

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