| MAY 10, 2010
Investors Start to
Make Their Voices Heard on Pay
Investor rebukes of executive-pay practices
last week at
Motorola Inc. and
Occidental Petroleum Corp. mark a significant shift in the relationship
between corporate boards and shareholders.
The messages came via "say on pay" votes at
the companies' annual meetings. Corporate activists have been arguing for an
advisory vote on executive pay for years, but such votes have only recently
become commonplace thanks to Congress, which required them for companies
that got federal bailout funds, and voluntary adoption by others.
Last year, not a single major U.S. company
lost a vote, despite widespread complaints over excessive pay. Some
governance watchers wondered if the measures lacked teeth, or if ordinary
investors just didn't consider pay to be an issue. After the defeats at
Motorola and Occidental, that has changed.
"This does demonstrate that shareholders will
use it to express their dissatisfaction," says Carol Bowie, head of the
Governance Institute at RiskMetrics Group Inc.'s ISS, which advises fund
managers on how to vote in corporate elections.
Some 300 say-on-pay votes are expected this
year, and boards and investors are watching to see how they pan out.
Legislation pending in the Senate would require all public companies to hold
an advisory vote.
The votes aren't binding, but they can draw
attention and force boards to consider a wider range of interests when
Evidence from the U.K., which has mandated
such votes since 2003, suggests the requirement does have an effect.
After the first big rejection in the U.K.—at
GlaxoSmithKline PLC in 2003—British boards started talking more with
shareholders about compensation, says Stephen Davis, executive director of
the Yale School of Management's Millstein Center for Corporate Governance
A 2007 study he conducted reported that
British top-executive pay had continued to increase—but at a slower pace—and
that the level of variable pay linked to performance targets had grown.
Golden parachutes shrank, as well.
"It did make progress in better aligning pay
with performance," Mr. Davis says. "It pried open a dialogue between boards
and investors," and U.K. boards now "build into their routine preparations
an outreach to investors."
Motorola gave shareholders a say-on-pay vote
last year, and the 64% support level was among the lowest of any company.
The vote covered 2008, when Motorola awarded
Sanjay Jha total compensation of $104 million after wooing him from
Qualcomm Inc. to turn around its struggling cellphone division.
In 2009, Mr. Jha earned much less—$3.8
million in total compensation, while Motorola's shares rose 68%.
But investors said they objected to the
windfall he would receive whether or not Motorola, as planned, splits its
mobile-phone and set-top-box business into a new company he would head.
If the deal goes through, Mr. Jha will get a
1.8% to 3% stake in the new company. If the split doesn't happen by June 30
of next year, he gets $38 million.
RiskMetrics advised fund managers to vote
against Motorola's pay practices this year partly because of that
arrangement, says Ms. Bowie. The American Federation of State, County and
Municipal Employees, whose pension funds hold shares, objected to the
A Motorola spokeswoman says "we take these
matters very seriously and will continue to engage with our shareholders,"
and that Mr. Jha's "compensation is aligned to the success of this
Occidental this year offered investors a say
on pay for the first time and failed to win majority support. CEO
Ray Irani, who received total compensation in 2009 of $31.4 million, has
long drawn criticism as one of the highest-paid chiefs in the U.S.
"The board compensation committee will
continue to expand its dialog with institutional investors to assess the
views, and we'll use that input to re-evaluate the company's compensation
philosophy, objectives and policies," Occidental spokesman Richard Kline
At some firms, even big dissents have
prompted changes in pay practice.
Berkshire Hills Bancorp Inc., based in Pittsfield, Mass., won only about
62% support for its pay practices last year. "We made changes particularly
with a focus on long-term performance," says David Gonci, Berkshire's
For its long-term incentives, the board now
looks at whether the company achieved targets over three years instead of
one. It evaluates more metrics, including return on equity, rather than just
earnings per share. Berkshire added more performance metrics to its annual
incentive plan, too.
The company missed its targets in 2009, so
the five top executives named in the proxy forfeited some compensation, Mr.
Gonci says. Total compensation for CEO Michael Daly fell 15% to $916,683. At
its annual meeting Thursday, Berkshire's pay practices won 97% support, Mr.
—Dana Mattioli and Niraj
Sheth contributed to this article.
Erin White at
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