This was supposed to be the
year when shareholders at public companies finally had their say about
executive pay. As a result of the passage of the Dodd-Frank Act last
July, shareholders for the first time can cast proxy votes on top
executives' compensation. Median pay of chief executives jumped 35
percent, to $8.4 million, for Standard & Poor's 500 CEOs in 2010. So
shareholders' say-on-pay votes, although only advisory, were expected to
widely challenge companies where compensation didn't reflect performance
or were out of line with those at competitors.
Services (ISS), which advises investor clients on proxy and shareholder
issues and is the largest firm of its kind in the U.S., has recommended
nay votes on pay for 293 companies so far this year. Among them: Pfizer
whose ex-CEO Jeffrey Kindler resigned in December with a severance
package valued by ISS at $34.4 million. Another is JPMorgan Chase (JPM),
where chief Jamie Dimon was awarded a 1,474 percent compensation boost
for 2010, to $20.8 million.
Yet through June 14,
shareholders by a majority vote objected to executive comp at just 32 of
the 1,998 companies that have convened annual meetings this year.
"Say-on-pay is at best a diversion and at worst a deception," says
Robert A.G. Monks, the veteran corporate governance activist who founded
ISS in 1985. "You only have the appearance of reform, and it's a cruel
Given that the proxy
advisory firm's clients typically comprise 20 percent of a company's
shareholder base, why so few nays on pay? Some of the credit—or
blame—goes to the Center on Executive Compensation. The three-year-old
center is an offshoot of the HR Policy Assn., a lobbyist on human
resources issues for 300 of the largest U.S. companies, including
Procter & Gamble (PG)
and IBM (IBM).
The center advised
companies that received negative ISS recommendations to send rebuttals
to shareholders and itself warned the nation's 100 biggest institutional
investors about possible "bias and errors" in proxy advisers'
recommendations. "We provided some guidance on how to tell their
pay-for-performance stories," says Charles Tharp, the center's CEO. The
center also published a white paper in which it said ISS has published
errors, holds excessive power, and has conflicts of interest because it
both consults with some companies on corporate governance and issues
proxy voting recommendations on them. The paper recommended that ISS,
Glass Lewis, the No. 2 proxy advisory firm, and others, be more strictly
regulated by the Securities and Exchange Commission.
Patrick McGurn, executive
director of ISS, disputes the center's claims and says the proxy adviser
isn't an irresponsible disrupter. He notes that ISS supported management
on 88 percent of say-on-pay votes. "These are K Street lobbyists who get
a good revenue stream out of saying things companies don't want to say,"
Many companies countered
ISS's recommendations in letters to shareholders. Pfizer took umbrage
with ISS's objections to ex-CEO Kindler's severance package, calling it
necessary to secure noncompete terms and "in the best interests of
shareholders." JPMorgan Chase said ISS's objection to CEO Dimon's pay
hike failed to grasp the big picture. "The Firm has come through the
worst economic storm in recent history stronger than ever, and a major
part of the Firm's success is due to Mr. Dimon's long-term vision,
leadership, disciplined approach and business acuity," the company said
in its letter.
also countered ISS's objection to CEO Rex Tillerson's $88 million pay
package over the past three years, when its stock generated a 5.8
percent negative return. ExxonMobil took issue with ISS using one-year
and three-year returns to gauge performance. "We believe the ISS model
is contrary to the best interests of shareholders," its letter said.
"The Compensation Committee of the Board uses well-informed judgment
when setting compensation."
The rebuttals were
effective. Pfizer won 57 percent of the shareholder vote on executive
pay. ExxonMobil and JPMorgan Chase received 67 percent and 73 percent
shareholder support, respectively.
Lynn Turner, a former
managing director for research at Glass Lewis and former chief
accountant at the SEC, says mutual funds, which own 70 percent of U.S.
equities and are many companies' biggest shareholders, cast few negative
pay votes out of business considerations. Corporations contract with big
mutual funds to run (401)k plans for their employees, he says, making
funds disinclined to dissent. The big mutual fund companies "won't vote
against management on compensation unless they're really bad," says
Some companies that
received negative ISS recommendations this year made changes and then
won the firm's blessing. General Electric (GE)
initially got a thumbs down this year because it granted CEO Jeffrey
Immelt 2 million options despite a lagging stock price. GE then
conferred with major shareholders, according to an SEC filing, and made
the vesting of Immelt's options contingent on the company meeting
performance targets. ISS then dropped its objections. ISS's McGurn says
cases like this show how say-on-pay helps foster accountability.
Anything that creates more "engagement" between management and
shareholders is good for corporate governance, he says.
line: Shareholders this year for the first time could vote on
executive pay. A majority voted against pay plans at only 32 of 1,998
Helyar is a reporter for Bloomberg News.