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Wall Street Journal, May 10, 2010 article


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MANAGEMENT   |   MAY 10, 2010

Investors Start to Make Their Voices Heard on Pay


Investor rebukes of executive-pay practices last week at Motorola Inc. and Occidental Petroleum Corp. mark a significant shift in the relationship between corporate boards and shareholders.

The messages came via "say on pay" votes at the companies' annual meetings. Corporate activists have been arguing for an advisory vote on executive pay for years, but such votes have only recently become commonplace thanks to Congress, which required them for companies that got federal bailout funds, and voluntary adoption by others.

Last year, not a single major U.S. company lost a vote, despite widespread complaints over excessive pay. Some governance watchers wondered if the measures lacked teeth, or if ordinary investors just didn't consider pay to be an issue. After the defeats at Motorola and Occidental, that has changed.

"This does demonstrate that shareholders will use it to express their dissatisfaction," says Carol Bowie, head of the Governance Institute at RiskMetrics Group Inc.'s ISS, which advises fund managers on how to vote in corporate elections.

Some 300 say-on-pay votes are expected this year, and boards and investors are watching to see how they pan out. Legislation pending in the Senate would require all public companies to hold an advisory vote.

The votes aren't binding, but they can draw attention and force boards to consider a wider range of interests when setting pay.

Evidence from the U.K., which has mandated such votes since 2003, suggests the requirement does have an effect. 

After the first big rejection in the U.K.—at GlaxoSmithKline PLC in 2003—British boards started talking more with shareholders about compensation, says Stephen Davis, executive director of the Yale School of Management's Millstein Center for Corporate Governance and Performance.

A 2007 study he conducted reported that British top-executive pay had continued to increase—but at a slower pace—and that the level of variable pay linked to performance targets had grown. Golden parachutes shrank, as well.

"It did make progress in better aligning pay with performance," Mr. Davis says. "It pried open a dialogue between boards and investors," and U.K. boards now "build into their routine preparations an outreach to investors."

Motorola gave shareholders a say-on-pay vote last year, and the 64% support level was among the lowest of any company.

The vote covered 2008, when Motorola awarded co-Chief Executive Sanjay Jha total compensation of $104 million after wooing him from Qualcomm Inc. to turn around its struggling cellphone division.

In 2009, Mr. Jha earned much less—$3.8 million in total compensation, while Motorola's shares rose 68%.

But investors said they objected to the windfall he would receive whether or not Motorola, as planned, splits its mobile-phone and set-top-box business into a new company he would head.

If the deal goes through, Mr. Jha will get a 1.8% to 3% stake in the new company. If the split doesn't happen by June 30 of next year, he gets $38 million.

RiskMetrics advised fund managers to vote against Motorola's pay practices this year partly because of that arrangement, says Ms. Bowie. The American Federation of State, County and Municipal Employees, whose pension funds hold shares, objected to the guarantee.

A Motorola spokeswoman says "we take these matters very seriously and will continue to engage with our shareholders," and that Mr. Jha's "compensation is aligned to the success of this business."

Occidental this year offered investors a say on pay for the first time and failed to win majority support. CEO Ray Irani, who received total compensation in 2009 of $31.4 million, has long drawn criticism as one of the highest-paid chiefs in the U.S.

"The board compensation committee will continue to expand its dialog with institutional investors to assess the views, and we'll use that input to re-evaluate the company's compensation philosophy, objectives and policies," Occidental spokesman Richard Kline said Friday.

At some firms, even big dissents have prompted changes in pay practice. Berkshire Hills Bancorp Inc., based in Pittsfield, Mass., won only about 62% support for its pay practices last year. "We made changes particularly with a focus on long-term performance," says David Gonci, Berkshire's investor-relations officer.

For its long-term incentives, the board now looks at whether the company achieved targets over three years instead of one. It evaluates more metrics, including return on equity, rather than just earnings per share. Berkshire added more performance metrics to its annual incentive plan, too.

The company missed its targets in 2009, so the five top executives named in the proxy forfeited some compensation, Mr. Gonci says. Total compensation for CEO Michael Daly fell 15% to $916,683. At its annual meeting Thursday, Berkshire's pay practices won 97% support, Mr. Gonci says.

—Dana Mattioli and Niraj Sheth contributed to this article.

Write to Erin White at


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