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Reuters, July 22, 2009 article



"Say on pay" rolls forward, but some investors wary

Thu Jul 22, 2009 1:39pm EDT

By Martha Graybow - Analysis

NEW YORK (Reuters) - U.S. activist investors could soon see a key item on their wish lists become reality: more influence over executive compensation. But could "say on pay" end up being more trouble than it's worth?

The U.S. Congress is moving forward on a measure to give public company shareholders a nonbinding annual vote on executive pay, a concept backed by President Barack Obama that has gained traction amid the recession and credit crisis.

Critics -- including some investor rights proponents -- argue that say on pay will not rein in U.S. business leader compensation or help spotlight companies where pay practices need a serious overhaul.

Some corporate governance experts say that if all companies must submit their pay plans to a shareholder vote, investors could face an overwhelming task. It could force pension funds and others to cast thousands of pay votes annually because their portfolios include many stocks, taxing their research teams and giving many voting decisions short shrift.

"I think with say on pay, it's be careful what you wish for -- you may get your wish," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware and an independent director at HealthSouth Corp.

"I don't think it will be the solution to the problem" of excessive pay "and will create other problems," he said.


Nonbinding shareholder votes on pay have been endorsed by investors who say it will force companies to engage them on the hot-button issue of executive compensation. The idea already has been introduced in countries such as the UK and Australia.

Supporters include the Council of Institutional Investors, which represents pension funds with combined assets of more than $3 trillion. Not surprisingly, Corporate America largely opposes the concept, out of a belief that company boards, not investors, are best able to determine executives' worth.

A few companies, such as Intel Corp and Hewlett-Packard Co, have decided to move forward with say-on-pay voting on their own. Others are awaiting congressional action before agreeing to hold such votes.

Draft legislation is circulating in the House of Representatives to require these nonbinding votes, part of a slew of proposed corporate reforms in response to the worst economic crisis in years.

The bill could be brought up for a vote in the House Financial Services Committee as soon as Thursday. If approved, it would go to the House floor for a vote.

Separately, a so-called "Shareholder Bill of Rights" introduced by Democratic U.S. Sen. Charles Schumer would also require say on pay at all public companies.


Some shareholders say they have already gotten a taste of say on pay voting and find it unwieldy and time-consuming.

The United Brotherhood of Carpenters, whose pension funds have about $40 billion in assets, says it cast more than 200 say-on-pay votes this year at companies participating in the government's Troubled Asset Relief Program. These companies needed to get their pay plans ratified by shareholders.

The union has proposed holding say-on-pay votes every three years rather than annually, and only at the largest U.S. corporations. It says this would give investors more time to assess pay plans, which must be reviewed individually because policies on calculating an executive's salary, bonus, stock options, perks and retirement benefits vary widely.

"We think less is more," said Edward Durkin, the union's corporate affairs director. "Fewer votes and less often would allow us to put more resources toward intelligent analysis."

One unintended consequence of say on pay could be to boost the influence of proxy advisory firms such as RiskMetrics Group Inc, because many investors will look to them for advice when weighing so many pay votes, said Francis Byrd, a governance expert at consulting firm The Altman Group.

Byrd also thinks companies may have a tough time assessing the meaning of these votes. If a pay package is voted down, it may not be clear why, he said.

Elson, of the University of Delaware, believes that under say on pay, investors will end up endorsing most compensation policies, providing cover to companies where pay practices need to be fixed.

He said many shareholders are now realizing the idea is no panacea, and that a better idea is for investors to use their existing tools of opposing the re-election of board members who are responsible for setting pay at problem companies.

"There are a lot of people who are unhappy with say on pay," Elson said. "I hope Congress takes that into account."

(Reporting by Martha Graybow; editing by John Wallace)


© Thomson Reuters 2009 All rights reserved




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