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Bailed-Out Firms Clamber to Satisfy Say-on-Pay Proviso

By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, April 8, 2009

NEW YORK, April 7 -- Nearly 400 companies that have accepted taxpayer funds are working to meet a new federal mandate that allows shareholders to vote on executive compensation packages at annual meetings this spring.

The rule, contained in the stimulus package adopted in February, represents a significant expansion of a fledgling say-on-pay movement that has taken hold in recent years at a handful of companies. Emboldened by the federal requirements, activist investors are pushing to have similar measures adopted at all public companies. The issue has had the backing of key legislators and appeared headed for approval this year. But yesterday, a key congressional committee said more stringent measures may now be needed instead.

"Say on pay might be too mild at this point," said Steven Adamske, spokesman for the House Financial Services Committee led by Rep. Barney Frank (D-Mass.).

The committee expects to deal with executive compensation as part of regulations being considered to address broad risks in the financial system, and it is unclear whether say on pay will be included in that effort, Adamske said.

Despite say-on-pay's advance, some question just how meaningful the shareholder votes will be. The measure gives shareholders an up-or-down vote on executive compensation packages, and the results are nonbinding.

Companies subject to the mandate, mostly banks participating in the Troubled Assets Relief Program, expected the votes would be enforced beginning next year and were taken by surprise when the Securities and Exchange Commission in late February issued guidelines requiring votes at all firms filing their proxy statements after the signing of the stimulus package Feb. 17. Many had to scramble to comply even as the annual statements were headed to the printers, according to compensation lawyers and consultants.

Mark Borges, a principal at Compensia, a compensation consulting firm, said nearly 80 percent of the 211 TARP banks that have filed proxies are putting the vote on the ballot in the barest form required by law.

"They're pretty perfunctory. It's not real clear what you're asking people to vote on," he said. "Some say, 'we will take into consideration the outcome of the votes.' Some companies are completely silent, which kind of leads you to wonder if they're going to do anything at all."

But advocates say the votes have led to better corporate governance practices overseas.

"Once boards get used to this process, they realize that the way to avoid embarrassment at an annual meeting is to get early notice of concerns by simply talking to their major shareholders," said Stephen Davis, a fellow at the Yale University's center for corporate governance.

Some compensation experts worry shareholders may vote their emotions in this populist environment, rather than analyze hundreds of proxy statements in a matter of weeks. In addition, many investors may not have the wherewithal to determine what constitutes an appropriate compensation plan; despite SEC rules to increase disclosure in plain language, proxies can be peppered with dense techno-speak. Those investors, some say, may simply follow the recommendation of proxy advisory firms.

Four of 23 recommendations issued by proxy adviser RiskMetrics Group tell shareholders to vote against executive pay packages.

American Federation of State, County and Municipal Employees, the largest union representing public employees, said it is sifting through proxy statements and will vote against compensation packages at Citigroup, Bank of America and American International Group, which caused a public uproar last month when it paid bonuses to employees in the unit responsible for its meltdown and billions in government injections.

"We're going to send a message about compensation," said Richard Ferlauto, director of pension-investment policy at AFSCME, a leader in pushing for the measure.

The vote at Bank of America, Ferlauto said, is in protest of $3.6 billion in bonuses paid out to Merrill Lynch employees shortly before it was acquired by the bank Jan. 1. Ferlauto said AFSCME has made clear to companies what aspects of compensation it is objecting to, and will post the logic behind its votes online.

Bank of America declined to comment. In its proxy, the bank highlights several features in executives' 2008 pay packages, including no year-end cash or equity incentive compensation, in asking for shareholder approval.

Citigroup is being targeted, Ferlauto said, because of multimillion-dollar retention awards to its top executives despite a loss of nearly $19 billion in 2008. Citigroup chief executive Vikram Pandit and Gary Crittenden, who recently stepped down from his position as chief financial officer, received $2.5 million in equity retention awards in 2008, according to Citigroup's proxy. The three other executives received $4.6 million to $6.6 million in retention pay, in the form of deferred cash compensation and stock awards.

A Citigroup spokesman said "significant thought and changes" have been applied to its compensation practices, including a procedure to recoup executive compensation that later proves to have been based on inaccurate information. The equity retention grants, the spokesman added, were determined in 2007 and paid out in early 2008.

An AIG spokeswoman said it has taken steps to restrict pay, such as a 56 percent reduction in compensation for its top 47 executives.

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