The Shareholder ForumTM

Electronic Participation in Shareholder Meetings

Forum Home Page [see Broadridge note below]

"E-Meetings" Home Page

"E-Meetings" Program Reference


Wall Street Journal, May 1, 2011 article


Need a Real Sponsor here


THEORY & PRACTICE   |   MAY 1, 2011, 5:19 P.M. ET

Firms Feel 'Say on Pay' Effect

Companies Work Harder to Win Shareholder Votes on Executive Compensation


As annual meetings loom, a new law is forcing U.S. companies to push harder to win shareholder approval for executive pay.

General Electric Co. and Lockheed Martin Corp. secured support for their executive pay plans last week after raising the bar at the 11th hour on stock-option grants already awarded to their chief executives. Pfizer Inc. and Johnson & Johnson squeaked through their "say on pay" votes after lobbying many institutional shareholders to ignore criticism of their compensation decisions.

The new atmosphere is the result of the Dodd-Frank financial-overhaul law, which gives shareholders at all but the smallest companies an advisory vote on executive pay, something governance advocates have long sought. This week, companies including aluminum producer Alcoa Inc. and medical-devices company Zimmer Holdings Inc. will face the music at their annual meetings.

The moves show that despite some early skepticism, the prospect of such votes has sparked boardroom debates over executive-pay practices that were long just rubber-stamped.

"I haven't previously seen that kind of activity on the eve of annual meetings," said Holly Gregory, a partner in the corporate-governance practice at Weil, Gotshal & Manges LLP in New York. "It highlights how seriously people are taking this advisory vote on compensation."

There remains plenty of upward pressure on pay. CEO cash bonuses rebounded in 2010, a survey of early proxy filings by pay consultants Hay Group for The Wall Street Journal found in March, and executives can be well rewarded by stock grants as company performance and share prices improve. Still, companies face more pressure to defend those packages. Though shareholder votes aren't binding, rejections embarrass boards.

Institutional Shareholder Services, which advises mutual funds and other large shareholders how to vote in corporate elections, has recommended "no" votes on executive pay at 186 companies, representing about 13% of the proposals it has reviewed this proxy season. Among those companies are Alcoa, which meets Friday, and Zimmer, which meets Monday.

ISS initially criticized Alcoa for boosting CEO Klaus Kleinfeld's compensation by 21% last year "despite the company's lagging shareholder returns." The proxy advisers also faulted Alcoa for linking equity awards to just one year of performance.

Similarly, ISS argued Zimmer Chief Executive David Dvorak was overpaid last year and blamed a "pay-for-performance disconnect." Both companies dispute the conclusions.

Companies that aren't backing down when ISS objects are expending more effort than usual to get pay practices approved. In the past, companies often just spelled out compensation in the proxy and left it at that. Now, they are drafting detailed rebuttals to ISS, bending the ears of major shareholders—which are showing greater readiness to vote against pay plans—and sending "get out the vote" reminders ahead of annual meetings.

Alcoa spelled out its arguments in a letter to investors and called a number of its large shareholders to press them for support, a spokesman said. The letter committed Alcoa to move to a longer performance period "when markets stabilize." Alcoa officials also made efforts to come to terms with the proxy adviser by negotiating with ISS over other steps, the spokesman added.

On Friday,those efforts paid off when Alcoa disclosed that certain 2011 stock awards will be tied to three years of performance. ISS dropped its objections.

Such efforts aren't always enough, however. So far, 10 companies in the Russell 3000 stock index already have suffered a defeat in say-on-pay votes this year, including Hewlett-Packard Co., Stanley Black & Decker Inc., Ameron International Corp., Shuffle Master Inc., Jacobs Engineering Group Inc., Beazer Homes USA Inc., Navigant Consulting Inc., Janus Capital Group Inc., Cogent Communications Group Inc. and Umpqua Holdings Corp. Spokesmen either said they are reviewing their options or didn't return calls for comment.

Other companies have made significant reversals to avoid negative ISS recommendations going into their annual meetings.

Days before Walt Disney Co. shareholders met on March 23, the media giant dropped "gross-up" provisions from employment agreements for chief Robert A. Iger and three fellow executives. Under the provisions, the company would have paid the taxes on payments due the executives in the event they lost their jobs in the wake of an acquisition.

The move was extraordinary in that it rescinded terms in contracts that were still valid. "Taking compensation rights away from officers is not easy or pleasant,'' said James D. C. Barrall, head of global executive compensation and benefits for Latham & Watkins LLP.

GE backed down and put performance hurdles on two million stock options awarded to Chief Executive Jeff Immelt after learning that shareholders including BlackRock Inc., which owns about 5% of GE's stock, intended to vote no on executive pay, a person familiar with the matter said.

GE and BlackRock, the world's biggest money-management firm by assets, wouldn't comment on the firm's voting intentions.

Umpqua, which owns an Oregon regional community bank, had little luck fighting back after ISS criticized the rise in CEO Raymond P. Davis's compensation while the bank holding company's stock performance lagged.

Umpqua approached a few dozen institutional investors holding 70% of the company's stock, said Steven L. Philpott, an executive vice president. It found 13 of the 20 biggest shareholders planned to accept ISS's negative recommendation, he said.

The result: About 62% of votes cast at Umpqua's April 19 annual meeting opposed its pay practices. The defeat reflects "the degree of influence that ISS has with our institutional investors" rather than flawed executive pay, Mr. Philpott said.

Still, the company said in a filing after the vote that it is now looking for ways to better align 2011 executive pay with total shareholder return. Thanks to mandatory say-on-pay votes, Mr. Philpott predicts, "everybody is going to have to adapt their expectations and practices."


Copyright ©2011 Dow Jones & Company, Inc. All Rights Reserved




This Forum program is open, free of charge, to anyone concerned with investor interests in the development of standards for conducting shareholder meetings with electronic participation. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

The organization of this Forum program was encouraged by Walden Asset Management, and is proceeding with the invited leadership support of Broadridge Financial Solutions, Inc. and Intel Corporation to address issues relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.