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Hawaii's Best Paid Executives

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And How Their Pay Is Determined

There is always a collective gasp and some outrage when the pay of top executives is publicized. In these economically challenging times, many people are angry that the CEOs of big corporations are paid so much more than the average Jane and Joe.

However, leading a large company or serving on its board comes with complex challenges, potential liability and, in the post-Enron era, the need to maintain public trust.

The Securities and Exchange Commission requires publicly traded companies to report the compensations of their five highest paid executives. Using the most recently filed SEC proxy statements, Hawaii Business ranks the six highest paid executives of Hawaii’s publicly traded companies, each with a compensation package of at least $1 million in 2011. We also list some of Hawaii’s highest paid nonprofit leaders, using the latest filings of IRS Form 990.

Companies say they carefully consider how much to pay their executives and often solicit outside advice. More stringent reporting requirements and shareholder control were imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama on July 21, 2010. For instance, the act provides shareholders with a nonbinding “say on pay” and corporate affairs.

The act also recognizes the importance of outside consultants, giving boards of directors’ compensation committees the authority to hire independent compensation consultants.

Compensation consultants are not required at any company. However, according to James Kim, managing director of Frederic W. Cook & Co., the consulting firm that advises Hawaiian Electric Industries and Hawaiian Holdings, the holding company for Hawaiian Airlines, the compensation committees of most publicly traded companies in Hawaii and elsewhere choose to retain an external consultant to provide market data and advice on the structure of compensation plans and agreements.

“We usually prepare studies using both a custom peer group of similar companies, as well as third-party surveys,” says Kim, who works out of the firm’s San Francisco office. “This report is presented to the compensation committee and we usually develop recommendations based on this data and the company’s compensation philosophy.”

HEI spokeswoman Shelee Kimura says her company’s executive compensation is developed using industry peer data and is heavily based on performance.

“Much of the target amount, between 45 to 60 percent, is ‘at-risk’ and not guaranteed,” explains Kimura. “By tying compensation to performance, the executive compensation program focuses our leaders on meeting goals that benefit shareholders, customers and the community.”

For example, “approximately 60 percent of the target amount for (HEI CEO Constance Lau) depends on meeting performance goals. Of the total shown in the proxy, the majority of the stock compensation is not paid out yet and is only an opportunity to earn it in the future.”

Likewise, a change in pension value is not an amount that was actually received, but a theoretical calculation that fluctuates year to year based on changes in interest rates driven by the overall economy. In the end, what executives receive from their pensions may be higher or lower than the theoretical calculation.

HEI says its executive pay is designed to be at or near the median of its relevant peer group of companies, and compensation is reviewed annually by an independent firm that analyzes proxy statements and advises shareholders on how to vote on “say on pay” proposals.

How effective is “say on pay” if the shareholders’ approval or disapproval is not binding?

“ ‘Say on pay’ has become far more influential than we initially thought,” Kim says. “Failure to obtain majority support can lead to shareholder litigation and embarrassment for the company. The Dodd-Frank Act has led to enhanced levels of disclosure and heightened awareness of risk.”

Meredith Ching, senior VP of Alexander & Baldwin, said in the company’s most recent proxy statement that A&B received very strong approval from “say on pay.” She reported that nearly 98 percent of the shareholders eligible to vote approved A&B’s compensation practices.

“Seventy-one percent of Stan Kuriyama’s stated compensation is performance-based, and therefore ‘at risk,’ ” Ching reported in the proxy statement, “and it only gets paid based on how the company performs or how the company stock performs.”

According to the proxy statement, Kuriyama has made a concerted effort to control his compensation, resulting in his compensation being significantly below the median compensation for his peers. In fact, the statement says, market competitive data shows that his compensation is in the bottom quartile of his peers.

Each of the six companies on our list of highest paid CEOs says it retains an outside compensation consultant to conduct an external, independent review of its executive compensation. Additionally, all say they have instituted “pay for performance” models when setting their compensation packages.

“Say on pay” and shareholder oversights do not apply to nonprofits, but they face their own checks and balances over executive pay.
The Dodd-Frank Act does not apply to nonprofits, but the Sarbanes-Oxley Act of 2002 led to new IRS rules on the compensation of nonprofit executives. Sarbanes was a direct response to the corporate and accounting scandals of Enron and Tyco in 2001 and 2002, and, like Dodd-Frank, its provisions apply only to publicly traded corporations.

After Sarbanes, the IRS created the Rebuttable Presumption of Reasonableness Test as a roadmap for nonprofit boards in setting their executives’ compensation.

“The IRS set out this test made up of factors such as independence, obtaining comparable data, examination by the board of the documentation and decision-making in the executive compensation determination process,” says Kate Lloyd, general counsel and VP of operations of the Hawaii Community Foundation. “If you get audited or if someone raises the question about executive compensation and you’ve met all these factors, the burden of proof is then on the IRS to determine if the compensation is unreasonable. What the test is really doing is forcing the board to think of how they’re setting compensation.”

Public reaction to executive compensation is often stronger for nonprofit leaders than for-profit company leaders.

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