Proposal gives shareholders non-binding say on exec pay
Obama administration offered legislation Thursday that would require
publicly traded companies to give shareholders a non-binding vote on the
compensation of CEOs and other highly paid executives and to vote on exit
packages, known as golden parachutes, at the time of a merger or
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.
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
"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
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.
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.
oppose push for say-on-pay by shareholders
Top executives have taken a relentless public
thrashing as they lay off workers and fight to keep stock prices above the
floor. In a suffering economy, no one seems happy with leadership, and the
image of CEOs has sunk so low that their approval scores are now south of
those serving in Congress. But no matter how low their image sinks, nor
how shrill the outrage, executives have remained steadfast in their
opposition to one thing: They are roundly against legislation that would
force companies to let shareholders vote on CEO compensation packages.
"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.
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
"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
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
Only 24 U.S. companies
have implemented say-on-pay without legislation, Wolfe says. Of those, only
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,"
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.
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 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
Restaurants, which operates
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.
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
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
"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."