THEORY & PRACTICE
| MARCH 22, 2010
Firms Use Third
Party to Judge Executive Pay
Boards Tap Consultants to Bless Compensation
Practices; Critics Complain Companies Are Just Buying Good Marks
DuPont Co. has discovered a new formula for
fending off shareholders who want a voice in how the chemical giant
compensates its top bosses: Get an outside second opinion.
DuPont retained consultancy Soundboard Review
Services LLC for a "fairness" judgment on how its directors set executive
pay, according to a proxy statement filed by the company Friday. The
advisory firm concluded those practices and processes are "sound," the proxy
said. About a dozen other companies have recently hired the New York
start-up to conduct similar reviews.
cofounders (left to right) William Coleman, Joshua Lurie and Gregory
Taxin in White Plains, N.Y.
The DuPont review didn't cover the amount or
type of pay afforded executives, however. And critics are concerned the
DuPont board is just buying good marks. Still, it is part of a wider effort
by directors and management to find fresh ways of offering shareholders more
information to deflect rising public anger over sizable executive rewards.
"I wish shareholders had a full appreciation
for the hard work" the DuPont board does "in setting executive
compensation,'' said Gregory P. Taxin, chairman of Soundboard.
Companies across the U.S. are grappling with
increased shareholder requests for a bigger voice in executive pay.
Resolutions that seek to give investors a nonbinding up or down vote on
compensation packages came up at 79 companies last year, winning average
support from about 46% of votes cast, according to
RiskMetrics Group Inc.
Congress would require those "say on pay"
votes at all companies under a Senate bill introduced March 15. A similar
measure passed the House in December. Though results aren't binding, they
can put pressure on boards to revamp practices.
Mr. Taxin, a former chief executive of proxy
advisers Glass, Lewis & Co., launched Soundboard last summer after he and
co-founders concluded investors needed more information before deciding
whether to back a say-on-pay resolution, how to vote if given a say on pay,
or whether to re-elect directors involved in executive-pay decisions. He was
joined by two ex-officials of
Salary.com, a pay Web site.
Boards pay the firm up front for a pay review
that typically lasts several weeks and costs between $25,000 and $75,000.
Clients decide whether to inform shareholders about the results.
At DuPont, Soundboard interviewed executives,
directors and the board's pay consultant. It also scrutinized confidential
documents, including meeting minutes for the board pay panel, management
proposals to alter pay and executives' performance reviews. The review
didn't cover the merits, amounts or types of pay awarded, the proxy noted.
Instead, Soundboard looked at whether the board pursued an "appropriate and
effective" process in making executive-pay decisions, the proxy said.
Mr. Taxin declined to say what weaknesses
Soundboard uncovered in DuPont's pay practices, if any. Directors wouldn't
hire Soundboard "if they felt any inadequacy or imperfection in their
process was going to be revealed publicly before the board has a chance to
fix it,'' Mr. Taxin explains. So far, Soundboard hasn't told other board
clients that their executive-pay practices are terrible, either. Mr. Taxin
says he isn't surprised because "nobody with crummy practices has come to
DuPont's good marks could prompt its
shareholders to reject a say on pay resolution for a third straight year
when it comes up at the company's April 28 annual meeting. Last year, the
measure garnered 46.1% of votes cast.
In the proxy, DuPont directors call say on
pay "a narrow, incomplete and ineffective means" for expressing shareholder
concerns about executive compensation. Picking the right pay practices
represents a complex task that the board compensation committee "is uniquely
positioned" to handle, they added, citing the Soundboard review. "We will
let the proxy stand for itself,'' said Lori Captain, a DuPont spokeswoman.
Certain institutional shareholders don't like
the idea of boards tapping hired guns to bless their oversight of
compensation. While investors hunger for a fuller picture of executive pay,
an outside review "bought for a stamp of approval" becomes worthless, says
Ann Yerger, executive director of the Council of Institutional Investors.
The Washington group represents more than 130 pension funds with more than
$3 trillion in assets.
The DuPont approach "is like paying a teacher
for your good grades,'' contends Lisa Lindsley, director of capital
strategies at the American Federation of State, County and Municipal
Employees union. "It sounds like a poor use of shareholder resources."
Mr. Taxin replies that "having somebody point
out weaknesses that can be corrected by the board is not a waste of
Other companies are taking different steps to
invite outside input on compensation issues. Last year,
Prudential Financial Inc. created a link on its Web site so investors
could comment about its pay plans. The life insurer received fewer than 100
comments, recollects Margaret M. Foran, Prudential's chief governance
officer. Among other things, the investor feedback helped persuade directors
to alter incentive-pay programs—and hold a say-on-pay vote for the first
time at the May 11 annual meeting. Investors overwhelmingly approved a 2009
resolution seeking that vote.
Prudential board members described such steps
in a detailed letter to shareholders displayed at the front of the latest
proxy. The letter, signed by each director, also urged investors to keep
posting comments on the pay Web site so "we are better positioned to fulfill
Joann S. Lublin at
Copyright ©2010 Dow Jones & Company,
Inc. All Rights Reserved