Docu-Drama: Shifting standards on pay

Jul 06, 2009 (San Jose Mercury News - McClatchy-Tribune Information Services via COMTEX) -- CHRDD | Quote | Chart | News | PowerRating -- Finding a way to pay executives based on how their company performs seems to have become the holy grail for most compensation committees these days. But crafting appropriate goals -- and then living by them -- is not easy.

Chordiant, the Cupertino supplier of software for "optimizing the customer experience," last week amended a filing it made in November regarding its 2009 executive bonus plan to clarify some wording for the benefit of at least one interested party: the Securities and Exchange Commission.

In its original filing, the company reported that its board had approved the 2009 Executive Incentive Bonus plan, which said bonuses would be paid to executives based on Chordiant's achievement of a sales goal in fiscal 2009.

However, for executives to receive a bonus, the plan required that the company also show an operating profit, excluding certain items, "except in limited circumstances."

In response to a comment by the staff of the SEC about what those limited circumstances were, Chordiant amended the plan by "clarifying" that the phrase actually includes "periods in which losses occur."

That seemed to us to be no limitation at all, so we asked Chordiant for our own clarification.

According to an e-mail from Chief Financial Officer Pete Norman, "the bonus plan in question set specific quarterly profit/loss thresholds that had to be met before bonuses would be paid. It is possible that the summation of

our four fiscal quarters could include quarterly losses, while the full fiscal year would still be profitable."

Even if sales don't measure up, Chordiant's executives would not necessarily be out of luck. Half of their bonus is subject to the discretion of the compensation committee, "without regard to the performance criteria set forth" in the bonus plan.

HOW'S THAT? At Ixys, the Milpitas manufacturer of power-control semiconductors, sales was one of five "performance objectives" the company listed last week in an SEC filing regarding the payout of potential bonuses to its chief executive and chief financial officer. The company said in May it would no longer provide investors with future sales estimates because of "changing economic conditions." Clearly, the compensation committee had no such problem.

Among the other performance objectives were gross margin, cash flow from operations, return on assets, and one listed simply as "discretionary," which could possibly carry the most weight of all, based on language approved by the compensation committee addressing the relationship between paying potential bonuses and the attainment of preset goals.

The committee made clear that the objectives "are not determinative, in and of themselves, of the amount of any performance payment." Instead, executive bonuses will be determined "by the committee in light of its evaluation of the executive's performance in total and not based on the mechanical application of any formula."

BETTER LATE THAN NEVER: Last week, the SEC proposed revising some of its rules on disclosures included in company proxy statements, the yearly communication between a company's board and its shareholders in advance of its annual meeting.

In her introductory remarks at the start of the July 1 meeting, SEC Chairman Mary Schapiro described proxies as "among the most significant communications between a company and its owners," and "central to the only process through which owners formally and regularly participate in the governance of the corporation."

"With over 800 billion shares being voted annually at over 7,000 company meetings, it is imperative that our proxy voting process work," said Schapiro, "starting with the quality of disclosure and continuing through to the integrity of the vote results."

Perhaps it's a sign of the changed economic times, but two of the proposed revisions involved "risk": one seeks better disclosure about the relationship between a company's overall compensation policies and its risk "profile," while another asks for a description of the board's role in managing risk.

Is that a barn door we hear shutting?

Contact Jack Davis at jdavis@mercurynews.com or 408-271-3788.

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