Martha Graybow - Analysis
NEW YORK (Reuters) - U.S. activist investors could soon see a key item on
their wish lists become reality: more influence over executive compensation.
But could "say on pay" end up being more trouble than it's worth?
The U.S. Congress is moving forward on a measure to give public company
shareholders a nonbinding annual vote on executive pay, a concept backed by
President Barack Obama that has gained traction amid the recession and
Critics -- including some investor rights proponents -- argue that say on
pay will not rein in U.S. business leader compensation or help spotlight
companies where pay practices need a serious overhaul.
Some corporate governance experts say that if all companies must submit
their pay plans to a shareholder vote, investors could face an overwhelming
task. It could force pension funds and others to cast thousands of pay votes
annually because their portfolios include many stocks, taxing their research
teams and giving many voting decisions short shrift.
"I think with say on pay, it's be careful what you wish for -- you may
get your wish," said Charles Elson, director of the Center for Corporate
Governance at the University of Delaware and an independent director at
"I don't think it will be the solution to the problem" of excessive pay
"and will create other problems," he said.
Nonbinding shareholder votes on pay have been endorsed by investors who
say it will force companies to engage them on the hot-button issue of
executive compensation. The idea already has been introduced in countries
such as the UK and Australia.
Supporters include the Council of Institutional Investors, which
represents pension funds with combined assets of more than $3 trillion. Not
surprisingly, Corporate America largely opposes the concept, out of a belief
that company boards, not investors, are best able to determine executives'
A few companies, such as Intel Corp and Hewlett-Packard Co, have decided
to move forward with say-on-pay voting on their own. Others are awaiting
congressional action before agreeing to hold such votes.
Draft legislation is circulating in the House of Representatives to
require these nonbinding votes, part of a slew of proposed corporate reforms
in response to the worst economic crisis in years.
The bill could be brought up for a vote in the House Financial Services
Committee as soon as Thursday. If approved, it would go to the House floor
for a vote.
Separately, a so-called "Shareholder Bill of Rights" introduced by
Democratic U.S. Sen. Charles Schumer would also require say on pay at all
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Some shareholders say they have already gotten a taste of say on pay
voting and find it unwieldy and time-consuming.
The United Brotherhood of Carpenters, whose pension funds have about $40
billion in assets, says it cast more than 200 say-on-pay votes this year at
companies participating in the government's Troubled Asset Relief Program.
These companies needed to get their pay plans ratified by shareholders.
The union has proposed holding say-on-pay votes every three years rather
than annually, and only at the largest U.S. corporations. It says this would
give investors more time to assess pay plans, which must be reviewed
individually because policies on calculating an executive's salary, bonus,
stock options, perks and retirement benefits vary widely.
"We think less is more," said Edward Durkin, the union's corporate
affairs director. "Fewer votes and less often would allow us to put more
resources toward intelligent analysis."
One unintended consequence of say on pay could be to boost the influence
of proxy advisory firms such as RiskMetrics Group Inc, because many
investors will look to them for advice when weighing so many pay votes, said
Francis Byrd, a governance expert at consulting firm The Altman Group.
Byrd also thinks companies may have a tough time assessing the meaning of
these votes. If a pay package is voted down, it may not be clear why, he
Elson, of the University of Delaware, believes that under say on pay,
investors will end up endorsing most compensation policies, providing cover
to companies where pay practices need to be fixed.
He said many shareholders are now realizing the idea is no panacea, and
that a better idea is for investors to use their existing tools of opposing
the re-election of board members who are responsible for setting pay at
"There are a lot of people who are unhappy with say on pay," Elson said.
"I hope Congress takes that into account."
(Reporting by Martha Graybow; editing by John Wallace)