TIAA-CREF Institute Corporate Governance Forum:Executive Compensation, Stock Options, and the Role of the Board


May 2005 |

The TIAA-CREF Institute sponsored its first Corporate Governance Forum, focusing on issues related to executive pay and the use of stock options. More than 100 individuals -- including corporate executives and directors, institutional investor representatives, academic experts, compensation consultants, regulators and others -- gathered to discuss these issues, and whether boards of directors (and their compensation committees) are sufficiently in control of the process of setting executive pay.

The conference featured a number of papers and presentations. David Yermack, associate professor of finance at New York University, and a critic of some pay practices, examined certain difficulties and quirks connected to current option compensation, as identified in recent academic research. Leading compensation consultant Frederic W. Cook, chairman of Frederic W. Cook & Co., discussed executive compensation trends, and emphasized the positive role played by stock options in aligning interests of shareholders and executives. Michael J. Mauboussin, chief U.S. investment strategist for Credit Suisse/First Boston, discussed important shifts in equity compensation resulting from the movement to a knowledge-based economy, but said recent market swings have shown that many option programs are poorly constructed. Mauboussin advocated the use of stock options indexed to peer groups or broad market benchmarks, such as the S&P 500. Stuart Gillan, research economist with the TIAA-CREF Institute, described rapidly rising potential dilution from stock option plans, and discussed issues of option valuation. Gillan also discussed alternatives companies are using to deal with the large number of so-called "underwater" options, with exercise prices above current market prices.

A number of speakers, including Frederic Cook, discussed ways in which CEO pay has been ratcheted upward, as companies seek to pay at or above the median. Some observers call this the "Lake Wobegone Effect," where all the CEOs are above average, leading to the pay equivalent of grade inflation.

Other speakers included former corporate director Clayton Yeutter, the former Secretary of Agriculture; Sanford R. Robertson, partner in Francisco Partners, a private equity fund; Harvard Business School Professor Joseph L. Bower; Samuel C. Scott, chairman president and CEO of Corn Products International; Peter N. Larson, former chairman and CEO of Brunswick Corporation; Larry G. Stambaugh, chairman, president and CEO of Maxim Pharmaceuticals; B.A. (Dolph) Bridgewater, senior consultant on corporate governance to TIAA-CREF, and former chairman and CEO of Brown Shoe; B. Kenneth West, senior consultant on corporate governance to TIAA-CREF, and former chairman and CEO of Harris Bankcorp.; Eric D. Roiter, senior vice president and general counsel, Fidelity Management and Research Company; Pearl Meyer, president of Pearl Meyer and Partners, a compensation advisory firm; Brian J. Hall, associate professor, Harvard Business School; and Abbie Smith, professor at the University of Chicago Graduate School of Business.

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