YORK | Wed Jan 5, 2011 2:42pm EST
(Reuters) - Corporate America is
bracing for the judgment of shareholders on lucrative executive pay
packages, tossing out some perks, tweaking pensions and taking pains to show
how compensation is linked to performance.
Nearly half the U.S. companies surveyed by consulting firm Towers Watson
were adjusting their pay-setting process ahead of the spring votes required
at least every three years under the Dodd-Frank financial reform law.
The "say-on-pay" votes are non-binding and come after a strong rally in
shares and two years of improved corporate earnings, perhaps blunting
shareholder anger at packages that averaged $9.25 million for CEOs at S&P
500 companies in 2009. That is 263 times the average worker's pay, according
to AFL-CIO data.
But advocates of the measure and some compensation experts say a number of
pay packages will likely be rejected by shareholders, putting pressure on
boards to improve compensation practices for chief executives and other top
"We do believe that the day of reckoning has come for overpaid executives,"
said Brandon Rees, deputy director in the office of investment at the
AFL-CIO union federation, a critic of excessive executive pay.
Some companies had already allowed advisory votes on pay as part of their
annual meetings, but the Dodd-Frank law that was enacted last year ensures
"There's a very strong awareness in the boardroom that shareholders are
going to be paying attention to pay for performance," said Doug Friske,
global leader of compensation at Towers Watson.
"Companies are looking at plans in anticipation of say-on-pay votes, looking
at aspects that might be considered irritants and deciding whether to keep
them," he said.
BOARD JOBS MAY BE AT STAKE
Pay-for-performance has been a mantra for years, and generous perks have
already been trimmed sharply in the face of shareholder ire.
Even so, the say-on-pay votes that will be on proxy statements this year are
one more step toward greater shareholder influence over compensation. Proxy
statements, typically sent in the spring, are used by companies to solicit
shareholder votes and report on top officers' pay.
Though many companies had already improved compensation practices, they are
paying more attention to how they explain their pay policies and taking a
second look at the link to performance, according to the survey by Towers
While say-on-pay votes are advisory only, most companies want to avoid the
embarrassment of a "no" vote. In addition, proxy advisory firms have said
that they may recommend that shareholders vote out any boards that ignore
Companies are especially reluctant to draw disapproval from proxy advisory
firms. These advisers are expected to gain influence because mutual funds
and other big investors do not have time to review every pay plan.
Among early filers that have already issued proxy statements, a number are
eliminating pay practices that have been cited as problematic by proxy
Visa Inc , Johnson Controls and Monsanto Co for example, have all said they
ended or limited some tax gross-ups, which are reimbursements for taxes paid
on perks or so-called golden parachutes.
Visa also said it ended purely personal use of its corporate aircraft by top
executives, a trend seen at many other large U.S. companies in recent years.
OVERALL PAY STILL EXPECTED TO RISE
The Securities and Exchange Commission in 2007 ignited the trend of
eliminating fringe benefits when it began requiring companies to provide
detailed disclosure of perks. Say-on-pay votes are expected to accelerate
"Some companies I've talked to have just taken the position that they're not
going to offer any perks to the executive team," said John MacDonald,
managing director at consulting firm LECG.
Though the composition of pay may change, it remains to be seen whether
overall compensation will be reined in.
Towers Watson says average CEO pay likely rose in 2010 as business
conditions improved and executives collected bigger bonuses or incentive
Since securities regulators began requiring more disclosure of CEO pay in
1992, executives have been able to see in detail what others are earning,
spurring "pay envy," said Broc Romanek, a former SEC lawyer and editor of
CompensationStandards.com, a website that helps consultants and directors
fashion pay practices.
"Every board wanted to pay their CEO in the top quartile," nudging median
pay higher every year, he said.
Investors have usually been tolerant of high CEO pay when the economy is
strong and companies are doing well. However, Occidental Petroleum, Motorola
and KeyCorp, had their pay packages rejected last year. That number may grow
as say-on-pay votes become widespread.
"Shareholders are still wounded in terms of the value of their portfolios
compared with three years ago," said Carol Bowie, head of compensation
research at Institutional Shareholder Services, a proxy advisory firm.
"They're going to be scrutinizing pay packages and pay changes very
carefully -- we certainly are."
(Reporting by Dena Aubin; Editing by