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RiskMetrics (f/k/a Institutional Shareholder Services - "ISS") Risk & Governance Blog, November 18, 2008 article














Tuesday, November 18, 2008

Labor Funds File Bailout-Related Proposals
Submitted by: Ted Allen, Publications

The Laborers’ International Union of North America and the International Brotherhood of Teamsters are filing new proposals that seek compensation reforms at companies that participate in the U.S. Treasury Department’s bailout program.

In the supporting statement for these 2009 resolutions, the labor funds argue that the pay restrictions in the Treasury’s Troubled Asset Relief Program (TARP) “fail to adequately address the serious shortcomings of many executive compensation plans.” Instead, the unions urge directors to adopt “more rigorous executive compensation reforms that we believe will significantly improve the pay-for-performance features of the Company’s plan and help restore investor confidence.”

According to the Associated Press, more than 110 financial firms have indicated that they likely will participate in the TARP’s Capital Purchase Program, under which the government has so far committed up to $250 billion to buy preferred stock. The labor funds have filed this resolution at JPMorgan Chase, KeyCorp, Bank of America, American Express, and SunTrust Banks, and plan to submit the proposal at more than 45 other firms.

The proposal calls for directors to adopt the following reforms:

* Limit annual incentive compensation to an amount not exceeding one times the senior executive’s annual salary;
* Require that a majority of long-term compensation be awarded in the form of performance-vested equity instruments;
* Freeze new stock option awards to senior executives, unless the options are indexed to peer group performance so that relative, not absolute, future stock price improvements are rewarded;
* Require senior executives to hold for the full term of their employment at least 75 percent of the shares of stock obtained through equity awards;
* Prohibit accelerated vesting for all unvested equity awards held by senior executives;
* Limit all senior executive severance payments to an amount no greater than one times the executive’s annual salary; and
* Freeze the accrual of retirement benefits under any supplemental executive retirement plan (SERP) for senior executives.

The labor unions urge directors to adopt all of these reforms unless barred by existing executive employment agreements. “At this critically important time for the Company and our nation’s economy, the benefits afforded the Company from participation in the TARP justify these more demanding executive compensation reforms,” the funds argue in their supporting statement.

The proposal does not specifically define “senior executives,” but regulations issued under TARP essentially define a senior executive officer (subject to TARP pay limitations) as the CEO, chief financial officer, and three other most highly compensated executive officers--in other words, the named executive officers in the proxy statement.

Labor officials told RiskMetrics that they expect that some companies will seek permission from the Securities and Exchange Commission to exclude these proposals on the basis that the firms have “substantially implemented” the requested reforms. “We anticipate a fight at the SEC, but we expect to win,” said Jennifer O’Dell, assistant director of the Laborers.


Copyright © 2007 RiskMetrics Group




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