Proposal gives shareholders non-binding say on exec pay

Gene Sperling, a senior adviser to Treasury Secretary Timothy Geithner, predicted the say-on-pay legislation will pass easily and in time for shareholder votes on CEO pay during the 2010 spring proxy season. It would be required of any company holding an annual meeting after Dec. 15, 2009. Shareholders would vote on CEO pay every year.

Pro-business groups, including the U.S. Chamber of Commerce and the Business Roundtable, are against the legislation. More liberal groups, such as the Institute for Policy Studies, say the legislation doesn't go far enough, because the shareholder vote would be non-binding.

The final decision regarding executive pay will remain with the board of directors. Sperling says that the law strikes the right balance and that the United Kingdom passed a similar law in 2002 that subsequent studies have shown is effective in aligning executive pay with companies' long-term prospects.

A USA TODAY survey of 31 CEOs in June found 77% oppose say-on-pay legislation. Most said it leads to micromanagement by shareholders when a board of directors should make such decisions. They say shareholders now can request a say-on-pay vote through the resolution process, but shareholders at only 24 companies have passed such resolutions.

"I wonder if the congressmen backing this legislation would propose similar laws governing their own compensation," Steve Hafner, CEO of travel search engine Kayak told USA TODAY. "I'd love to vote on congressional pay and perks."

Asked Thursday if the administration would support a public vote on the pay of elected officials, Sperling said: "In a democracy, we can remove people if we think their votes are incorrect."

Insurance company Aflac adopted say on pay two years ago. Shareholders approved the pay of CEO Dan Amos by 93% in 2008 and by 97% this year when Amos declined a $2.8 million bonus.

Sperling detailed separate legislation intended to make the compensation committees that determine executive pay more independent and to let them hire pay consultants who have no relationship to corporate management.

CEOs openly oppose push for say-on-pay by shareholders

"I wonder if the congressmen backing this legislation would propose similar laws governing their own compensation," says Steve Hafner, CEO of travel search engine Kayak. "I'd love to vote on congressional pay and perks."

That executives oppose congressional noodling with their pay is unsurprising. What is surprising is that they are willing to go so public in their opposition, even though passage of a so-called "say-on-pay" law is likely, says Dawn Wolfe, associate director of social research for Boston Common Asset Management.

President Obama, who co-sponsored say-on-pay legislation while in the Senate, remains in support, as is the Democrat-controlled Congress. Likewise the public at large. Focus groups have been describing CEO pay with words such as "obscene" and "immoral" rather than words like "excessive" or "overly generous" as in the past, says Leslie Gaines-Ross, chief reputation strategist at Weber Shandwick.

"Everyone I talk to understands say-on-pay legislation to be a question of when, not if," Wolfe says. "There is a sense in the investment community that it is inevitable."

CEOs have opinions like everyone else, but the public rarely sees that side because positions on anything controversial risk upsetting customers. When they feel compelled to take a stand at odds with the public, it is usually articulated by trade associations and lobbyists, so as to put CEOs and the companies they run at arm's length from controversy. Not this time. Even though say-on-pay legislation is almost a sure thing, CEOs and former CEOs contacted by USA TODAY spoke out against it, both forcefully and individually.

"Say-on-pay is just another government regulation and intrusion into free enterprise," says Howard Putnam, former CEO of Southwest and Braniff airlines.

No one likes downward pressure applied to their pay, and in this respect CEOs are no different than professional athletes, rock stars, union members, Social Security recipients — and elected officials. Howard Behar, former president of Starbucks, asks: Why not let people vote on the salaries of government workers? He says government employee unions influence politicians, who commit huge resources to pensions and raises to get re-elected.

How say-on-pay would work

Say-on-pay legislation would require companies to give shareholders an up-or-down vote each year on the compensation of the top five executives of publicly traded companies. The vote would not be binding, leaving the final decision in the hands of boards of directors. However, directors are elected by shareholders and a shareholder vote against a pay package would likely pressure directors to rethink the package and make changes.

The Netherlands requires binding shareholder votes on executive pay. The U.S. law would model those in Britain, Australia, Norway, Spain and France, where the vote is non-binding. Boston Common Asset Management has been pushing shareholder say-on-pay resolutions for three years, and Wolfe says she doesn't understand the CEO opposition, as there are only two examples in Britain when shareholders voted a majority against a CEO's pay: at GlaxoSmithKline in 2003 and at home builder Bellway in 2009. It may be true that most CEOs are fairly paid, she said, which means they have nothing to fear.

Only 24 U.S. companies have implemented say-on-pay without legislation, Wolfe says. Of those, only Aflac and RiskMetrics did so without it first coming to a shareholder vote. The Securities and Exchange Commission continues to get feedback regarding say-on-pay at companies that have accepted government money under the Troubled Asset Relief Program (TARP).

At Aflac, shareholders approved the pay of CEO Dan Amos by 93% in 2008, and that approval rose to 97% this year when Amos did not accept a $2.8 million bonus even though he had met the conditions of the bonus as set by the Aflac board.

"That tells me that (shareholders) had the ability to look beyond the price of stocks and understand," says Amos, who supports say-on-pay at Aflac but declines to weigh in on what is best at other companies. Giving shareholders a voice "takes away the frustration that is out there," he says. "People just want to be heard."

Sarah Anderson, director of the global economy program for the liberal think tank Institute for Policy Studies, says say-on-pay is a first step but does not go far enough to rein in abuses. She cites oil executives who had big paydays that had nothing to do with personal performance and everything to do with spikes in oil prices. But shareholders didn't "bat an eye" because they were happy with rising stock prices.

"Everyone, not just shareholders, has a stake in fixing the executive compensation system," Anderson says.

Ralph Ward, publisher of Boardroom Insider, an online newsletter about boards of directors, agrees that say-on-pay does not go far enough, because it offers shareholders "so little substance."

Substance or not, CEOs complain that say-on-pay is government intrusion into the private sector. Such consensus among CEOs is rare because they run very different companies that can be made winners and losers on a range of sensitive issues, from energy to health care. They lean Republican, but there are signs that they are increasingly blue, and 40% supported Democrats during the last presidential primary season, according to an unscientific USA TODAY survey. But when USA TODAY last month contacted 31 CEOs and former CEOs of large companies, 77% were against say-on-pay.

Are CEOs fairly compensated? Two of the 31 CEOs declined to answer, but 24 of the other 29 (83%) said yes. Five (17%) said that, in general, CEOs are overcompensated. When asked if say-on-pay would influence CEO compensation, 76% said yes.

CEO median compensation at S&P 500 companies rose 23% from 2003-2008 despite going down 7.5% to $8 million from 2007 to 2008, according to Equilar, which tracks executive compensation. John Castellani, president of the Business Roundtable, an association representing CEOs of companies with more than $5 trillion in annual revenue, says shareholders have always had the ability to enforce say-on-pay by using the shareholder resolution process. That makes legislation unnecessary, he says.

The pro-business U.S. Chamber of Commerce is also against legislation. "The decision to allow say-on-pay votes should come, as it has, through a dialogue between shareholders, directors and management, not via a Washington mandate," says Tom Quaadman, the chamber's executive director for capital markets.

CEOs' arguments against it

CEOs say the legislation would open the door to micromanagement by largely uninformed shareholders, who understand neither the competitive market forces that drive executive pay nor the complex incentives designed by experts to get the best results. The law could drive top talent to private companies and injure the ability of U.S. companies to compete in a global market, they say.

"You cannot run companies effectively through the democratic process of voting on all things," says Judy Odom, former CEO of Software Spectrum. "Independent boards should be elected, and they should do their jobs."

While most shareholders are uninformed, some are so informed that they could use a say-on-pay law to an unfair advantage, says Andrew Puzder, CEO of CKE Restaurants, which operates Carl's Jr. and Hardee's. For example, certain investors could threaten to vote "no" on the CEO's pay to coerce the CEO into making decisions for short-term gain, such as delaying capital investment or taking on unnecessary debt. Such tactics could temporarily boost the stock price to the detriment of the company's long-term health, he says.

An argument could be made that CEO pay is excessive and does not drive performance, says Anders Gustafsson, CEO of publicly traded Zebra Technologies, which sells printing services to 90% of Fortune 500 companies. But he says CEOs have a significant impact on company performance and are being unfairly targeted in a bad economy because their pay is publicly disclosed.

CEOs are not unanimous in their opinions, even where it comes to pay. Patrick Byrne, CEO of Internet retailer Overstock, says he is more concerned about CEOs influencing boards than shareholders influencing CEOs.

"The CEO is hired by shareholders. He works for them, just like a farmhand works for the folks who own the ranch," says Byrne, among the CEOs who support say-on-pay legislation. He says CEOs "capture" their boards, leaving shareholders unrepresented.

Real estate developer Don Peebles, recently named byForbes as one of the 20 wealthiest African-Americans, also supports say-on-pay. He says CEOs who have no significant ownership often have compensation packages designed to reward them on the upside, but they suffer few consequences on the downside.

"There is no real alignment of interests," Peebles says.

But Behar says he has served on eight boards and says directors are not stupid, and they are in control of CEOs.

"How will our country be better off if CEOs earn less than $2 million a year?" says Behar. "Are we trying to create a country without the opportunity to get rich? We had better be careful about the buttons we push down. We may not like the ones that pop up."

Copyright 2009 USA TODAY, a division of Gannett Co. Inc.