'Say-on-Pay' Movement Loses Steam

By Tomoeh Murakami Tse
Washington Post Staff Writer
Tuesday, May 6, 2008

NEW YORK, May 5 -- The movement to give shareholders greater say on executive compensation marked a watershed Monday. At its annual shareholder meeting, Aflac, the large insurer, became the first major American company to give investors a vote on how senior managers are paid. Pay packages for the top five executives passed resoundingly.

But some corporate governance experts and activist shareholders said there might not be too many more moments like it. They said the "say-on-pay" campaign, which seemed to be catching fire as recently as six months ago, had lost some of its momentum.

More than halfway through the annual shareholder-meeting season, proposals aimed at giving stockholders an advisory vote on executive pay packages have failed to win widespread support. So far this year, just two such resolutions have garnered majority support, at Apple and at printer manufacturer Lexmark International. Neither has agreed to give shareholders a formal say.

To the surprise of advocates, these measures have received less support than they did last year at most financial companies, despite anger over handsome executive payouts made as share prices plunged. At Citigroup, Merrill Lynch, Morgan Stanley, Wachovia and U.S. Bancorp, support for such proposals declined this season.

"I thought we'd have a couple of more majority votes earlier on," said Richard Ferlauto, director of pension-investment policy at the American Federation of State, County and Municipal Employees, which is sponsoring many of the more than 90 say-on-pay proposals. "There hasn't been an across-the-board breakthrough yet."

The proposals generally call for an up-or-down vote on executive compensation packages and are non-binding. Last year, more investors voted for these measures than voted against them at eight companies. But so far, only three of those -- Verizon, Par Pharmaceuticals and Blockbuster -- have agreed to accept the outcome. Aflac decided to give shareholders the authority to approve pay before the measure was ever put to a vote.

The campaign is now in its third year. In 2006, seven proposals came to a vote, receiving average support of 40 percent. Last year, investors voted on 51 proposals, which drew an average of 43 percent support. The movement appeared to make headway during the public outrage over outsize executive pay, such as the $210 million golden parachute awarded to former Home Depot chief executive Robert L. Nardelli. Congress chimed in with legislation calling for a shareholder vote on pay. It passed in the House, but the Senate bill, proposed by Democratic presidential candidate Barack Obama (Ill.), has stalled.

So far this year, about 30 proposals have been voted on, and support has averaged only 42 percent, according to RiskMetrics Group, which tracks shareholder proposals.

Ferlauto and others pointed to several reasons for the leveling off of support. They said new e-proxy rules, which allow companies to send out proxy materials and collect shareholder votes online, have caused voter participation to fall. At some financial firms, the shareholder base has been diluted by sovereign wealth funds that have taken large stakes at the invitation of management.

Investor groups said they also did not count on aggressive campaigning against the measures by companies, which have appealed to shareholders in letters and phone conversations to reject them. Companies argued that the marketplace for executive talent, not shareholders, should determine how executives are paid and that shareholders have other ways of registering their dissatisfaction, including withholding votes from directors.

But some shareholder activists and corporate governance experts said the lukewarm support highlighted say-on-pay's shortcomings. Critics said a simple up-or-down vote makes it hard for corporate directors to understand what shareholders find objectionable in often complex compensation packages.

"I think it's a half step. It doesn't get us ultimately to where we need to be," said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.

The solution, he said, is not to have a system to reject pay but to create a better election process for directors who serve on compensation committees.

For their part, supporters said the shareholder vote is just one factor that boards should consider when negotiating executive pay and that this process has led to meaningful dialogue between directors and investors in places like Britain, where it is mandated by law.

Ed Durkin, director of corporate affairs for the United Brotherhood of Carpenters and Joiners, said he worries that say-on-pay could fuel further increases in executive compensation because most shareholders were likely to vote for plans unless they were noticeably out of line with pay levels at similar companies.

Instead, his group is pushing for measures that seek to link pay to performance more directly, filing 34 such "pay for superior performance" proposals this year. Of those, his group has withdrawn 28 after companies agreed to modify or consider changes to their pay plans, Durkin said.

He said new Securities and Exchange Commission rules that require companies to disclose more information about pay are helping shareholders better understand the compensation granted to senior management. Shareholders, Durkin said, will be able to use the data to conduct deeper analysis and meaningful dialogue with companies.

The expanded disclosure requirements, which went into effect last year, have been criticized for their dense legalese and lack of transparency. After last year's shareholder season, the SEC sent letters to hundreds of companies asking them to better explain how and why their executives are paid the way they are.

Data suggest that while the pace of change is glacial, more companies are tying a larger portion of their chief executive pay directly to performance and disclosing performance targets more clearly.

In 2007, 42 percent of the compensation for chief executives of companies in the Standard & Poor's 500-stock index was linked directly to predetermined performance goals, compared with 40 percent in 2006 for the same group of executives, according to Equilar, an executive-compensation research firm. Stock options were not counted as part of performance-based pay.

Over the same period, the number of Fortune 100 companies disclosing specific performance targets for executives increased from 56 to 66 percent, Equilar said.

In the meantime, some companies have begun giving their shareholders a form of say on pay. At Littlefield, an Austin-based gaming firm, the company is asking investors to vote on two advisory proposals regarding pay. The resolutions seek investor input on whether the total compensation received by the chief executive and directors in 2007 is within 20 percent of an acceptable amount.

At RiskMetrics, the management is putting forward three pay-related proposals, asking shareholders whether they approve its compensation philosophy, how it was applied in 2007 and how the company plans to apply it in 2008.

"I wouldn't be surprised to see [say-on-pay proposals] retooled somewhat to be more specific," said Claudia H. Allen, chairwoman of the corporate governance practice group at Neal Gerber & Eisenberg. "Not everybody agrees on what they're voting on."

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