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January 30, 2007
"Say on Pay" Highlighted in the Upcoming 2007 Proxy Season
by Anne Moore Odell
Institutional investors band together, asking for the right to weigh in on top executive
compensation packages.
SocialFunds.com --
It seems like simple logic: an executive’s compensation should reflect the job she or he is
doing at the corporation she or he works for. However, in many cases, executive compensation
packages have not mirrored the performance of US corporations. Many shareholders are fed up with
this discrepancy between executive compensation and corporate earnings. And what’s even more
maddening for these investors, under current law shareholders have no say in helping decide
executive paychecks.
 Two groups have recently asked US
companies and the SEC to reconsider their closed stance on investor involvement with executive
review and compensation. A network of 41 US institutional investors recently announced the filing
of shareholder resolutions at 44 major US companies asking companies to grant shareholders an
advisory vote on executive compensation packages. At the same time, an international group of funds
wrote to the SEC requesting advisory votes on executive pay at US companies.
The US
network was woven together by the American Federation of State, County and Municipal Employees (AFSCME) Pension Plan and Walden Asset
Management. These institutional investors include public pension funds, labor funds, asset
managers, foundations, and members of Interfaith Center on Corporate Responsibility (ICCR). Although the group is manifold, their resolution is single: "an
annual, non-binding advisory vote on the summary compensation table that every corporate board
presents to investors in its yearly proxy statement."
Companies received the resolution
because institutional investors felt that their executive pay has been markedly excessive or
because the gap between corporate performance and executive pay especially egregious over the past
three to five years. Citigroup, Coca-Cola, Exxon Mobil, Home Depot, Jones Apparel, Merck, Nabors,
Pfizer, Qwest, Time Warner, UnitedHealth, and Wal-Mart are a partial list of companies who received
the resolution.
Timothy Smith, Senior Vice President of Walden Asset Management and
President of the Social Investment Forum shared his views with
SocialFunds.com on the "say on pay" resolutions. "The vote will give investors an opportunity to
send a message to the Compensation Committee about the scale of the compensation package as well as
its link to performance. The other option unhappy investors have chosen in the past is voting
against Directors serving on the compensation committee."
Although the SEC has new rules
in place to expand disclosure of CEO compensation, this group of institutional investors argues the
current law does not address excessive executive compensation. Some investors believe that the new
disclosure laws might actually lead to higher pay for top executives as they demand what peers are
making. The institutional investors who filed the resolutions concerning executive compensation are
counting on shareholders voting this 2007 proxy season to agree that disclosure of compensation is
not enough and shareholders’ voices need to be listened to when creating executive compensation
tables.
"These rules are exceedingly important to get a full view of executive
compensation, but as the SEC Chair Cox has stated, the SEC's role is to provide information for
investors," Smith explained to SocialFunds.com. "It is up to the markets to act to provide checks
and balances on compensation."
"Shareholders expect compensation committees to establish
appropriate measures that tie
executive pay to company performance," said Connecticut
Treasurer Denise L. Nappier. "Far too many compensation plans are fashioned in such a way that
executives are rewarded regardless of long-term return on investment. An advisory vote gives
shareholders the opportunity to let compensation committees know when they’re not making the
grade," she added.
Currently, companies in the United Kingdom, Australia, Netherlands and
Sweden allow shareholders to cast advisory votes on executive compensation. The UK law has been in
place since 2002 and has restrained the growth of executive compensation packages.
With
the positive experiences of the UK in hand, a group of institutional investors from the UK, the US
and Europe sent a letter to SEC Chairman Christopher Cox. The letter stated that a non-binding vote
on CEO pay would let shareholders tell companies how they feel about the jobs executives are doing.
The international group listed many benefits advisory votes have played in UK and other
international markets. For one, the dialogue between companies and investors has been valuable to
both parties, they wrote in the letter to Chairman Cox, with companies using longer-term
performance targets in their compensation plans. Secondly, they said that many of Britain’s largest
companies are moving from CEO salary to performance-based pay, which they attribute in part to
advisory votes.
Some US companies have already started to respond to investors’ requests
to have a "say on pay." "Companies like Pfizer and Schering Plough have stated this concept has
real merit and they plan to work with others to study how this could be implemented in the U.S.
markets," Smith told SocialFunds.com.
As major investors join together and learn the power
of working for shared goals, the effects are long reaching. As Smith reported "Certainly this
[network] will strengthen working relations between investors focusing on governance and those
focusing on social/environmental issues."
©
SRI World Group, Inc. All Rights Reserved.
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