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Why Goldman Sachs Should Manage Like Apple

Chief executives take lots of stick for their often extravagant pay, which frequently bears no connection to whether a company makes or loses money. That's why it's easy to forget that some CEOs deserve every penny.

In a new report, The Corporate Library identifies companies that excel at linking executive compensation with corporate performance (no public link). These "pay for success" organizations, as the governance research firm calls them, span a range of industries, including tech, health care and the restaurant business.

Notably, no financial services firms are on the list.

All of these companies handle comp differently. But there are some commonalities, the report states:

  • Incentives not paid for below-median performance
  • Challenging performance targets
  • Fewer stock options and restricted stock and more performance-related equity awards
  • Long-term incentives that aren't based on simple stock price measures
  • Generally low levels of perks
  • Moderate employee benefits
  • Few employment agreements and consequently little or no severance benefits
Another key: Companies treated CEO pay similarly to the comp given to other managers within the organization. That includes setting salary ranges and using companywide bonus plans. Several of the anointed companies also have started using "clawback" provisions. Those require, for instance, execs to return stock options if the company's earnings fall.

Now for some companies that do make the list: Apple (AAPL), Autozone (AZO), Darden Restaurants (DRI), Humana (HUM), Nucor (NUE).

Apple's an interesting choice because, as The Corporate Library notes, the company's comp practices weren't always so aligned with shareholder interests. In 2004, for instance, Apple's board effectively repriced 20 million shares in underwater stock options for CEO Steve Jobs, resulting in a huge gain.

By contrast, the gadget maker is one of the few U.S. companies that respected shareholder wishes to hold an annual, non-binding vote on executive pay. Apple is introducing a so-called say on pay vote at its 2010 annual meeting. The company also offers no special severance or other payments if Apple is acquired, and it provides the same level of benefits and perks to all employees regardless of rank.

In addition, Apple uses restricted stock, rather than stock options, for pay. That helps stockholders by reducing the number of shares the company must issue for compensation.

Perhaps most important, Apple doesn't pay bonuses if the company doesn't fully meet, not just approach, revenue and profit targets. Says The Corporate Library:

While this might seem obvious, it does not accord with the practice of 90 percent of U.S. companies whose executives receive bonuses -- albeit below target ones -- even if they meet around 80 percent of the target set for them.
While Apple has greatly improved its comp practices, steelmaker Nucor has long been a leader in linking CEO pay to corporate performance. The company keeps fixed pay levels low, with base salaries below the level of most competitors. Annual bonuses are paid only if Nucor hits its return-on-equity goals. It calibrates those bonuses by comparing the company's net sales growth with those of peer companies.

Nucor also has eliminated time-vesting stock option grants, while issuing only moderate amounts of time-based restricted stock. Execs must hold part of these stock-based rewards until they retire. All of these measures are aimed at keeping managers focused on long-term results.

But surely, the skeptics will say, a company with such stringent comp practices can't compete in a world where any chief exec worth her salt can simply cross the street to collect a boatload of stock options. Nucor proves otherwise. According to its annual shareholder report, it has been profitable every year since 1966. In a notoriously tough industry.

Indulge my stating the obvious -- this is not how large financial companies operate. But it can and should be. In light of these (and related) findings, bankers' claims that reining in pay would ultimately harm company earnings don't wash.

Yes, compensation standards vary by industry. But the gap between how companies like Apple and Nucor operate and the historical norm on Wall Street, where bonuses are paid come rain or shine, can't be accounted for by a difference in product line.

For financial companies, as we've learned, questions about executive comp go far beyond its impact on corporate performance. Pay is an element of risk. In other words, one cause of the financial crisis was that Wall Street firms provided execs with huge incentives to take even huger chances.

That culture lives. Many large financial companies are on track in 2009 to award record employee pay, including year-end bonuses. Goldman Sachs (GS), JPMorgan Chase (JPM) and Morgan Stanley (MS) -- all of which accepted government financial aid -- this year are expected to issue nearly $30 billion in bonuses.

Wall Streeters tout the importance of innovation. Here's their chance -- do as Apple does.

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