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New York Times, May 17, 2009 column


May 17, 2009

Fair Game

When a Company Tries It, a ‘Say on Pay’ Works

ISOLATED and imperial chief executives who shun contact with the great unwashed — shareholders who actually own the companies — are a distressingly resilient breed.

That’s why the current “say on pay” movement, which requires companies to put executive pay practices to a shareholder vote, is so timely. It fosters fruitful dialogues between shareholders and the hired hands who run their enterprises.

Still, many company leaders continue to believe they are beyond reproach. So it’s refreshing to see executives consulting their shareholders for input on compensation and other hot-button issues.

A case in point is Robert S. Silberman, the chief executive of Strayer Education, a profit-making education company that runs Strayer University, a 118-year-old institution with 60 campuses in 15 states, mostly in the eastern part of the nation. The university educates about 45,000 students, and its enrollment grew 20 percent in 2008.

Earnings have also been rising at Strayer. Last year, net income grew 24 percent, and in the first quarter of 2009, earnings per share advanced 25 percent. Strayer shares closed last week at $192.60, down 10 percent for the year.

Mr. Silberman, who joined Strayer in 2001, is a former chief executive at CalEnergy and a former assistant secretary of the Army. He is paid well for his work at Strayer.

In each of the past two years, he has received pay packages worth almost $8 million. Last year’s package consisted of a $665,000 salary, a $495,000 bonus, and stock dividends on unvested shares of $477,000. Finally — and this is where some trouble began — Mr. Silberman received $475,000 in cash payments last year on unexercised but vested stock options.

That’s right: he got a payment from his company for options he held but hadn’t even exercised.

This highly unusual pay practice got the attention of Bob Gabele, principal of 3D Advisors, an independent research firm and an authority on insider stock transactions. “In my 30 years of analyzing insider behavior, this is the only time I have seen this sort of practice,” Mr. Gabele said last week.

Strayer’s proxy says that it began making these cash payments to all holders of vested and unexercised stock options in March 2006. The payments were made on the same date and in the same amount as the company’s common stock dividend, Strayer explained, “to encourage executives and directors to hold such options, and therefore better aligning their interests with those of the corporation.”

To Mr. Gabele, however, it understandably raised a flag. And he wasn’t the only critic of this policy. Institutional Shareholder Services, the proxy advisory firm, also raised it as an issue for Strayer’s shareholders to consider.

Mr. Silberman says that no one complained to him about the dividends paid on his options (which he concedes were “a little baroque”) until I.S.S. flagged them in a report this year. When that happened, Mr. Silberman decided to call his top 20 shareholders, who control over half of Strayer’s shares, to get their opinions on the matter.

“Eighteen of the 20 said they were totally happy,” Mr. Silberman recalled. “Two of the 20 said they were happy with the amount of compensation, but that they would prefer we got rid of the dividend payments. So we did.”

One shareholder who was critical of the payments was Ron Baron, chief executive of Baron Capital, manager of the Baron Funds, with around $13 billion in assets.

“We have been an investor in Strayer since the initial public offering in 1996 and Silberman is one of my favorite guys,” Mr. Baron said. “But he was paying a dividend on stock options, and we didn’t think that was fair or appropriate.”

Mr. Baron said that it was not unusual for him to try to persuade companies whose shares he owns to change practices he finds questionable. The topics that Mr. Baron said that he has been taking up with companies recently are overly generous change-of-control provisions and payments to executives to cover the taxes that their pay and perquisites generate.

“When they have payment provisions that are not in accord with what we think is right, we say, we think this is wrong and that it should be changed,” he said. His targets have been almost completely accommodating, he added.

“We try to make it clear that the governance of a company has to be in favor of the shareholder.”

For his part, Mr. Silberman said that this was the first time he had picked up the phone to call top shareholders of a company he oversees. Nevertheless, he said, “it was an enjoyable exercise.”

“I don’t know that ‘say on pay’ is the answer in every case, but in my own, I would be delighted to have my own compensation approved by shareholders,” he added.

IT doesn’t hurt that Strayer has recorded strong growth in recent years and that its stock price has performed fairly well. Many chief executives of companies whose shares have tumbled would be terrified to call their shareholders to discuss pay.

But communicating with shareholders on touchy issues can earn executives a ton of good will and help keep them grounded in reality.

We all know that top managers — anyone for that matter — are imperiled when they surround themselves with toadies. Communicating with critical owners may seem like undergoing root canal, but that’s one of the burdens of being a good manager.

Too often, chief executives forget that they are the hired help. It is up to shareholders to remind them, as often as possible.



A version of this article appeared in print on May 17, 2009, on page BU1 of the New York edition.



Copyright 2009 The New York Times Company




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