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May 15, 2009
CalSTRS Issues Guidelines for Adoption of Executive Compensation Policies
    by Robert Kropp

Nation's second-largest public pension fund offers principles for the adoption of executive compensation policies, as well as recommendations for addressing issues important to shareowners.

Skyrocketing executive compensation packages have been much on the mind of responsible investors this year. It is widely believed that risky corporate practices, which may result in short-term gains but ignore long-term consequences, arise from the terms of excessive compensation packages and have contributed to the current global economic crisis. Activist shareowners have responded by introducing a record number of Say on Pay shareowner resolutions addressing executive compensation for the 2009 proxy season.

In order to provide a framework for the evaluation and regulation of executive compensation, the California State Teachers' Retirement System (CalSTRS), the second-largest public pension fund in the US with $111.6 billion of assets in its portfolio, launched an initiative calling for the development of executive compensation policies at 300 of its portfolio companies. The initiative also supports shareowner votes on executive compensation policies.

CalSTRS has published two documents in support of the development of responsible executive compensation policies. The first, entitled Principles for Executive Compensation, sets forth five general principles for companies to consider in their development of such policies.

Companies should develop clear philosophies on executive compensation, and design their policies in a comprehensive manner that addresses all relevant components. The policies should be distinguished by such efforts at transparency as full disclosure. Companies should establish independent compensation committees that will be accountable for the design, implementation, and monitoring of their executive compensation programs.

The second document, entitled CalSTRS Executive Compensation Model Policy Guidelines, is designed to communicate to companies the expectations of shareowners for executive compensation policies. According to CalSTRS, the policies must include several components for the expectations of shareowners to be satisfied.

Policies should include the articulation of the role of an independent compensation committee, describe executive compensation targets and the mix of base, bonus, and long-term incentive compensation included in those targets, and include the intended forms of incentive and bonus compensation.

Additionally, policies should discuss equity compensation, and dilution plans for existing owners. Clear policies on re-pricing of executive stock options must include explicit shareowner approval of a controversial practice that is gaining popularity with companies in the wake of the stock market meltdown.

Finally, executive compensation policies should include information on benefits for executives following retirement, and address the impact of tax and accounting matters on compensation programs.


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