“Say on Pay” Gets Its Day

Executive compensation is still the talk of the boardroom as legislation goes to the Senate.

By James Hyatt

"Say-on Pay” legislation, which passed the House in April by a 2-1 margin, faces a less certain fate in the Senate. The “Shareholder Vote on Executive Compensation Act” would require companies to allow a nonbinding vote on compensation disclosed in proxy statements, starting in 2009.

The legislation calls for a separate advisory vote if a company gives a new, not yet disclosed, “golden parachute” while simultaneously negotiating to buy or sell a company.

Rep. Barney Frank of Massachusetts, Chairman of the House Financial Services Committee, calls it “a bill to further the workings of the capitalist system of the United States. It has one very specific provision; it says that the shareholders, the owners of public corporations, will be allowed to vote every year in an advisory capacity on the compensation paid to their employees who run the companies.”

Sen. Barack Obama of Illinois has introduced a similar measure, which is pending in the Senate Banking, Housing and Urban Affairs committee.

Meanwhile, the “Say on Pay” movement continues to pick up steam.

A robust 57 percent of Blockbuster’s shareholders approved an advisory “say-on-pay” proposal sponsored by the New York City Employees’ Retirement System, apparently the largest vote for such a proposal. And in February, Columbus, Ga.-based insurance company Aflac said directors agreed to give shareholders a nonbinding vote on executive compensation effective in 2009. “Our shareholders, as owners of the company, have the right to know how executive compensation works,” said Aflac Chairman and CEO Dan Amos. “The board’s action is in keeping with Aflac’s longstanding pay-for-performance compensation policy and our commitment to transparency at all levels.”

Verizon Communications in mid-May said a proposal for an advisory vote on senior executive compensation received 50.18 percent of the vote and that its board would “further consider its policies in light of the high level of shareholder interest” as well as the discussions on advisory votes “in a variety of forums, including in the U.S. Congress.”

Some shareholders have argued that Verizon’s CEO compensation was excessive based on the company’s performance.

Institutional shareholder groups continue to press for more say on compensation issues at annual meetings. In its midseason review of the 2007 proxy season, Institutional Shareholder Services (ISS), the proxy and corporate governance advisory service, noted that investors have filed more than 60 “say on pay”resolutions and that at 18 annual meetings, advisory vote proposals had averaged 42.5 percent approval, up from 40 percent at seven meetings in 2006. At least five proposals had received more than 45 percent support.

Investment firm T. Rowe Price recently amended its policies to support say-on-pay resolutions. “We’re not in favor of allowing shareholders to set the compensation, but we are in favor of letting shareholders have a voice,” an official told The Wall Street Journal. “If they feel executive comp is too high, they should be able to express that to the board.”

The Chartered Financial Analyst (CFA) Institute Centre for Financial Market Integrity says its members strongly support requiring public companies and boards to submit their annual compensation plans for an advisory shareholder vote.

The survey said 76 percent of respondents support nonbinding votes as part of the annual proxy process. However, 68 percent opposed mandating advisory votes through legislation.

Kurt Schacht, Managing Director of the CFA Institute Centre, said, “knowing such a vote will be taken sharpens directors’ attention to and explanation of executive compensation practices. Investors are tired of learning after the fact about ‘golden parachutes’ and executives whose pay isn’t tied to performance.”

Still, major corporations have serious reservations about the idea. “Requiring a shareholder vote on compensation—even an advisory vote—would seriously erode critical board responsibility,” the Business Roundtable’s President told the House Financial Services Committee before the legislation was approved. Because setting pay involves company goals, performance metrics and negotiated contract terms, “it would be difficult to effectively subject some or all of these elements to a voting process,” the group declared. The Roundtable also said “it would be naïve to think that once shareholders had the right to vote on compensation, special interests would have no interest in expanding the right to other major decisions.”

The SEC, meanwhile, has been exploring a different path with a series of roundtables examining the merits of limiting binding resolutions to by-law change proposals while leaving nonbinding issues to online forums.

According to an ISS account of the first roundtable, Delaware Chancery Judge Leo Strine Jr. compared nonbinding proposals to “prisoner litigation for stockholders” and described them as “imaginary” votes. “In Delaware, shareholders vote on ‘real’ things, such as the election of directors and major transactions,” the judge noted. Likewise, the SEC, in a briefing paper for the forum, said “it is questionable whether the proxy system is the most efficient means of shareholder communication with management on purely advisory matters.”