As annual meetings loom, a new law is
forcing U.S. companies to push harder to win shareholder approval for
General Electric Co. and
Lockheed Martin Corp. secured support for their executive pay
plans last week after raising the bar at the 11th hour on stock-option
grants already awarded to their chief executives.
Pfizer Inc. and
Johnson & Johnson squeaked through their "say on pay" votes after
lobbying many institutional shareholders to ignore criticism of their
The new atmosphere is the
result of the Dodd-Frank financial-overhaul law, which gives
shareholders at all but the smallest companies an advisory vote on
executive pay, something governance advocates have long sought. This
week, companies including aluminum producer
Alcoa Inc. and medical-devices company
Zimmer Holdings Inc. will face the music at their annual meetings.
The moves show that despite some early
skepticism, the prospect of such votes has sparked boardroom debates
over executive-pay practices that were long just rubber-stamped.
"I haven't previously seen that kind of
activity on the eve of annual meetings," said Holly Gregory, a partner
in the corporate-governance practice at Weil, Gotshal & Manges LLP in
New York. "It highlights how seriously people are taking this advisory
vote on compensation."
There remains plenty of upward pressure
on pay. CEO cash bonuses rebounded in 2010, a survey of early proxy
filings by pay consultants Hay Group for The Wall Street Journal found
in March, and executives can be well rewarded by stock grants as
company performance and share prices improve. Still, companies face
more pressure to defend those packages. Though shareholder votes
aren't binding, rejections embarrass boards.
Institutional Shareholder Services,
which advises mutual funds and other large shareholders how to vote in
corporate elections, has recommended "no" votes on executive pay at
186 companies, representing about 13% of the proposals it has reviewed
this proxy season. Among those companies are Alcoa, which meets
Friday, and Zimmer, which meets Monday.
ISS initially criticized Alcoa for
boosting CEO Klaus Kleinfeld's compensation by 21% last year "despite
the company's lagging shareholder returns." The proxy advisers also
faulted Alcoa for linking equity awards to just one year of
Similarly, ISS argued Zimmer Chief
Executive David Dvorak was overpaid last year and blamed a
"pay-for-performance disconnect." Both companies dispute the
Companies that aren't backing down when
ISS objects are expending more effort than usual to get pay practices
approved. In the past, companies often just spelled out compensation
in the proxy and left it at that. Now, they are drafting detailed
rebuttals to ISS, bending the ears of major shareholders—which are
showing greater readiness to vote against pay plans—and sending "get
out the vote" reminders ahead of annual meetings.
Alcoa spelled out its arguments in a
letter to investors and called a number of its large shareholders to
press them for support, a spokesman said. The letter committed Alcoa
to move to a longer performance period "when markets stabilize." Alcoa
officials also made efforts to come to terms with the proxy adviser by
negotiating with ISS over other steps, the spokesman added.
On Friday,those efforts paid off when
Alcoa disclosed that certain 2011 stock awards will be tied to three
years of performance. ISS dropped its objections.
Such efforts aren't always
enough, however. So far, 10 companies in the Russell 3000 stock index
already have suffered a defeat in say-on-pay votes this year,
Stanley Black & Decker Inc.,
Ameron International Corp.,
Shuffle Master Inc.,
Jacobs Engineering Group Inc.,
Beazer Homes USA Inc.,
Navigant Consulting Inc.,
Janus Capital Group Inc.,
Cogent Communications Group Inc. and
Umpqua Holdings Corp. Spokesmen either said they are reviewing
their options or didn't return calls for comment.
Other companies have made significant
reversals to avoid negative ISS recommendations going into their
Walt Disney Co. shareholders met on March 23, the media giant
dropped "gross-up" provisions from employment agreements for chief
Robert A. Iger and three fellow executives. Under the provisions,
the company would have paid the taxes on payments due the executives
in the event they lost their jobs in the wake of an acquisition.
The move was extraordinary in that it
rescinded terms in contracts that were still valid. "Taking
compensation rights away from officers is not easy or pleasant,'' said
James D. C. Barrall, head of global executive compensation and
benefits for Latham & Watkins LLP.
GE backed down and put
performance hurdles on two million stock options awarded to Chief
Jeff Immelt after learning that shareholders including
BlackRock Inc., which owns about 5% of GE's stock, intended to
vote no on executive pay, a person familiar with the matter said.
GE and BlackRock, the world's biggest
money-management firm by assets, wouldn't comment on the firm's voting
Umpqua, which owns an Oregon regional
community bank, had little luck fighting back after ISS criticized the
rise in CEO Raymond P. Davis's compensation while the bank holding
company's stock performance lagged.
Umpqua approached a few dozen
institutional investors holding 70% of the company's stock, said
Steven L. Philpott, an executive vice president. It found 13 of the 20
biggest shareholders planned to accept ISS's negative recommendation,
The result: About 62% of votes cast at
Umpqua's April 19 annual meeting opposed its pay practices. The defeat
reflects "the degree of influence that ISS has with our institutional
investors" rather than flawed executive pay, Mr. Philpott said.
Still, the company said in a filing
after the vote that it is now looking for ways to better align 2011
executive pay with total shareholder return. Thanks to mandatory
say-on-pay votes, Mr. Philpott predicts, "everybody is going to have
to adapt their expectations and practices."