'Say-on-Pay' Movement Loses Steam
Washington Post Staff Writer
Tuesday, May 6, 2008; D01
NEW YORK, May 5 -- The
movement to give shareholders greater say on executive compensation
marked a watershed Monday. At its annual shareholder meeting, Aflac, the
large insurer, became the first major American company to give investors
a vote on how senior managers are paid. Pay packages for the top five
executives passed resoundingly.
But some corporate governance experts and activist shareholders said
there might not be too many more moments like it. They said the
"say-on-pay" campaign, which seemed to be catching fire as recently as
six months ago, had lost some of its momentum.
More than halfway through the annual shareholder-meeting season,
proposals aimed at giving stockholders an advisory vote on executive pay
packages have failed to win widespread support. So far this year, just
two such resolutions have garnered majority support, at
Apple and at printer manufacturer
Lexmark International. Neither has agreed to give shareholders a
To the surprise of advocates, these measures have received less
support than they did last year at most financial companies, despite
anger over handsome executive payouts made as share prices plunged. At
U.S. Bancorp, support for such proposals declined this season.
"I thought we'd have a couple of more majority votes earlier on,"
said Richard Ferlauto, director of pension-investment policy at the
American Federation of State, County and Municipal Employees, which is
sponsoring many of the more than 90 say-on-pay proposals. "There hasn't
been an across-the-board breakthrough yet."
The proposals generally call for an up-or-down vote on executive
compensation packages and are non-binding. Last year, more investors
voted for these measures than voted against them at eight companies. But
so far, only three of those --
Verizon, Par Pharmaceuticals and
Blockbuster -- have agreed to accept the outcome. Aflac decided to
give shareholders the authority to approve pay before the measure was
ever put to a vote.
The campaign is now in its third year. In 2006, seven proposals came
to a vote, receiving average support of 40 percent. Last year, investors
voted on 51 proposals, which drew an average of 43 percent support. The
movement appeared to make headway during the public outrage over outsize
executive pay, such as the $210 million golden parachute awarded to
Home Depot chief executive
Robert L. Nardelli. Congress chimed in with legislation calling for
a shareholder vote on pay. It passed in the House, but the Senate bill,
proposed by Democratic presidential candidate
Barack Obama (Ill.), has stalled.
So far this year, about 30 proposals have been voted on, and support
has averaged only 42 percent, according to
RiskMetrics Group, which tracks shareholder proposals.
Ferlauto and others pointed to several reasons for the leveling off
of support. They said new e-proxy rules, which allow companies to send
out proxy materials and collect shareholder votes online, have caused
voter participation to fall. At some financial firms, the shareholder
base has been diluted by sovereign wealth funds that have taken large
stakes at the invitation of management.
Investor groups said they also did not count on aggressive
campaigning against the measures by companies, which have appealed to
shareholders in letters and phone conversations to reject them.
Companies argued that the marketplace for executive talent, not
shareholders, should determine how executives are paid and that
shareholders have other ways of registering their dissatisfaction,
including withholding votes from directors.
But some shareholder activists and corporate governance experts said
the lukewarm support highlighted say-on-pay's shortcomings. Critics said
a simple up-or-down vote makes it hard for corporate directors to
understand what shareholders find objectionable in often complex
"I think it's a half step. It doesn't get us ultimately to where we
need to be," said Charles Elson, director of the Center for Corporate
Governance at the
University of Delaware.
The solution, he said, is not to have a system to reject pay but to
create a better election process for directors who serve on compensation
For their part, supporters said the shareholder vote is just one
factor that boards should consider when negotiating executive pay and
that this process has led to meaningful dialogue between directors and
investors in places like Britain, where it is mandated by law.
Ed Durkin, director of corporate affairs for the United Brotherhood
of Carpenters and Joiners, said he worries that say-on-pay could fuel
further increases in executive compensation because most shareholders
were likely to vote for plans unless they were noticeably out of line
with pay levels at similar companies.
Instead, his group is pushing for measures that seek to link pay to
performance more directly, filing 34 such "pay for superior performance"
proposals this year. Of those, his group has withdrawn 28 after
companies agreed to modify or consider changes to their pay plans,
He said new
Securities and Exchange Commission rules that require companies to
disclose more information about pay are helping shareholders better
understand the compensation granted to senior management. Shareholders,
Durkin said, will be able to use the data to conduct deeper analysis and
meaningful dialogue with companies.
The expanded disclosure requirements, which went into effect last
year, have been criticized for their dense legalese and lack of
transparency. After last year's shareholder season, the SEC sent letters
to hundreds of companies asking them to better explain how and why their
executives are paid the way they are.
Data suggest that while the pace of change is glacial, more companies
are tying a larger portion of their chief executive pay directly to
performance and disclosing performance targets more clearly.
In 2007, 42 percent of the compensation for chief executives of
companies in the Standard & Poor's 500-stock index was linked directly
to predetermined performance goals, compared with 40 percent in 2006 for
the same group of executives, according to Equilar, an
executive-compensation research firm. Stock options were not counted as
part of performance-based pay.
Over the same period, the number of Fortune 100 companies disclosing
specific performance targets for executives increased from 56 to 66
percent, Equilar said.
In the meantime, some companies have begun giving their shareholders
a form of say on pay. At
Littlefield, an Austin-based gaming firm, the company is asking
investors to vote on two advisory proposals regarding pay. The
resolutions seek investor input on whether the total compensation
received by the chief executive and directors in 2007 is within 20
percent of an acceptable amount.
At RiskMetrics, the management is putting forward three pay-related
proposals, asking shareholders whether they approve its compensation
philosophy, how it was applied in 2007 and how the company plans to
apply it in 2008.
"I wouldn't be surprised to see [say-on-pay proposals] retooled
somewhat to be more specific," said Claudia H. Allen, chairwoman of the
corporate governance practice group at Neal Gerber & Eisenberg. "Not
everybody agrees on what they're voting on."