Some shareholders are angry about soaring executive
pay. Soon, they may get a voice.
Ahead of this year's annual meetings, activist
investors have submitted shareholder proposals at roughly 60 companies
seeking an advisory vote on executive pay, according to Institutional
Shareholder Services. Targets include Citigroup Inc., Wells
Fargo & Co., WellPoint Inc. and Northrop Grumman Corp.
The vote would be nonbinding, but activists hope that
public censure, or the threat of it, would prompt directors to curb
outsized awards and better link pay with performance. The proposals come
as new Securities and Exchange Commission rules requiring greater
disclosure promise to cast a brighter spotlight on compensation.
This week, U.S. Rep. Barney Frank (D., Mass.), the new
chairman of the House Financial Services Committee, plans to introduce a
revised version of his 2005 bill that aimed to give shareholders power
to veto executive-pay deals. He will hold a hearing next week on his
latest measure, which instead would require advisory votes.
The activists are taking a page from the British. Since
2003, United Kingdom shareholders have cast advisory votes on corporate
compensation policies and how much they pay executives. Investors and
companies say the practice, which began after the British government
passed a law requiring it for all public companies, has generated more
discussion between shareholders and boards.
But it hasn't necessarily curbed compensation.
"We have better disclosure and better accountability,"
says Ian Jones, head of responsible investment at Co-operative Insurance
Society Ltd., an insurance company with about $40 billion under
management. But "I don't think it's had much effect on the amount of
British CEOs have long made less on average than their
U.S. counterparts, but pay in both markets has risen at roughly
comparable rates in recent years, with some indications pay may have
risen faster in the U.K. than in the U.S. The median salary and bonus
for CEOs at 250 large and mid-size U.K. companies totaled £610,000 ($1.2
million) in 2005, the latest year for which data are available,
according to the U.K. arm of ISS. That's up 9.9% from 2004 and 35.6%
from £450,000 in 2003.
In the U.S., median CEO salary and bonus hit $2.4
million in 2005, up 7.1% from 2004, and up 13.7% from $2.1 million in
2003, at 350 large companies studied by Mercer Human Resource
Consulting. The companies in the 2003 and 2005 samples varied somewhat.
Stephen Davis, a fellow at Yale University's Millstein
Center for Corporate Governance and Performance who has studied the U.K.
experience, says the advisory vote has strengthened the link between pay
and performance. For example, pay consultants say the practice has
pushed British companies to shift executive compensation toward bonuses
and away from big salary increases. But Mr. Davis says "Investors still
feel...that pay is not yet fully aligned with performance in the way
that they would like."
Mr. Davis says companies and investors are on a
learning curve, but he says the vote appears to have helped curb
severance packages. At the start of the decade, a three-year payout was
standard; today, a one-year payout is "virtually universal," Mr. Davis
says. But he says directors worry that investors reviewing dozens of pay
plans are issuing "cookie-cutter" judgments rather than evaluating
Big U.K. shareholders applaud the increased discussion.
Talks, often held in advance of annual meetings, are "more meaningful"
than the occasional formal presentations managers used to offer
shareholders, says Colin Melvin, head of corporate governance at
London-based Hermes Pension Management Ltd., which manages $120 billion
For instance, in 2003, 50.7% of votes cast by
shareholders opposed a pay package for GlaxoSmithKline PLC Chief
Executive Jean-Pierre Garnier. The pharmaceutical maker later agreed to
overhaul its pay policies and end "what might be deemed 'payment for
failure,'" according to its 2004 letter to shareholders. Dr. Garnier's
total pay package fell slightly in 2004, to $4.56 million from $4.57
million the year before.
Ahead of the 2004 shareholder meeting, Glaxo sent draft
copies of its compensation report to large shareholders, according to
Richard Singleton, the director of corporate governance at F&C Asset
Management. Mr. Singleton emailed Glaxo's then-chairman, Sir Christopher
Hogg, suggesting tougher performance targets for executives to earn
bonuses. The company added a clause stating performance targets would
consider analysts' forecasts.
"I was delighted," Mr. Singleton says. The clause
remains part of Glaxo's compensation policy.
A Glaxo spokesman confirmed the clause was inserted in
the 2004 report, but he declined to comment on the process. Sir
Christopher couldn't be reached.
Tlk doesn't always translate into action. Early last
year, London-based investment manager Amvescap PLC decided to pay
its departing chairman, Charles W. Brady, a $9 million bonus. ISS's
British arm believed the payment was unjustified, according to director
of research David Paterson, and considered opposing the compensation
Amvescap's company secretary, Michael Perman, told an
ISS analyst that executives considered the bonus reasonable because Mr.
Brady had shepherded Amvescap through a tough period and had hired a new
chief executive. The analyst wasn't convinced, and ISS recommended that
investors oppose the compensation report; at the annual meeting, 48% of
votes cast did. Mr. Brady did get the bonus.
An Amvescap spokesman declined to comment beyond a
written statement from Amvescap Chairman Rex Adams on the day of the
vote: "Over the last weeks, Amvescap has initiated direct discussions
with many of our company's major shareholders, and we believe we have a
good understanding of their views."
Despite the shortcomings, U.K. investors are among
those pushing U.S. companies to adopt the advisory vote. In January, a
group of 13 institutional investors, nine British, wrote SEC Chairman
Christopher Cox to endorse the practice. The group, which collectively
has $1.5 trillion under management, said the votes would bolster
communication between shareholders and directors, better link pay with
performance and "provide a counter-weight" to rising executive pay.
Companies in Australia, Sweden and the Netherlands also grant
shareholders a vote on pay.
In the U.S., the American Federation of State, County
and Municipal Employees union sponsored "say on pay" resolutions at
seven companies last year and 10 so far this year, says Richard Ferlauto,
director of pension and benefit policy for AFSCME. ISS says the
resolutions last year won an average of 40% support, which is high for
This year, AFSCME is co-leading a group of companies
and shareholders to discuss the idea. The group includes Pfizer,
Intel Corp., Schering-Plough and American International Group
Inc., as well as the California Public Employees' Retirement System and
Some corporate participants in the group think the
concept has merit, but they worry about the mechanics. One sticking
point: How to give shareholders a voice on elements of a pay package
that companies are legally bound to pay, such as an executive's deferred
compensation? "You create an expectation that you can do something about
it" if investors reject the package, says one person close to the
Alex Kelly, head of investor relations at
Schering-Plough, says the company is willing to consider letting
shareholders vote on pay. "We're willing to listen," he says.
Other companies oppose the notion. In a statement to be
included in its proxy, Wells Fargo argues that an advisory pay vote
"would provide no clear or meaningful guidance" because directors
wouldn't know which portion of compensation investors objected to.
Shareholders already have plenty of ways to tell directors what they
think, the company states. Wells Fargo also contends that the U.S. and
U.K. corporate systems have "significant differences in regulatory and
corporate governance policies and practices."
Other companies aim to keep the proposal off the proxy.
WellPoint contended to the SEC staff that the proposal could be kept off
the ballot; SEC rules allow companies to exclude proposals in some
circumstances, including if it's "misleading." On Friday, WellPoint was
notified that the SEC staff agreed "there appears to be some basis for
your view." So WellPoint will now keep it off the proxy, a spokesman
says. A spokeswoman for proposal submitter Connecticut Retirement Plans
and Trust Funds said it won't try to appeal to the SEC. Instead, it will
support the say-on-pay idea in other ways, such as by supporting
legislation Mr. Frank plans to introduce.
Another company, Northrop Grumman, has also argued to
the SEC that the proposal should be kept off the proxy. As of Friday,
the company had not heard back, a spokesman said.
-- Joann S. Lublin contributed to this article.
Write to Erin White at
and Aaron O. Patrick at