As President-elect Barack Obama sets forth to take on Washington, legislation regarding say on pay is likely to be implemented early on. Very few companies are volunteering advisory votes to shareholders.
Richard C. Ferlauto, director of Corporate Governance and Pension Investment for the American Federation of State, County and Municiple Employees (AFSCME); Christianna Wood, CEO of Capital Z Asset Management and director on H&R Block’s board; and Charles G. Tharp, professor of human resources in the School of Management and Labor Relations at Rutgers University, and former compensation consultant for Towers Perrin, weighed in on the future of say on pay during a RiskMetrics forum on executive compensation.
Under Obama’s administration, Ferlauto believes that say on pay legislation will be implemented early on. “Everyone can bank on that say on pay will be legislated sometime in the first quarter of the administration,” says Ferlauto. “Congressman Barney Frank proposed a bill that passed and the sponsor was Obama.” He adds that Hilary Clinton sponsored say on pay legislation and it is a high priority for both the Senate and House.
Companies that have adopted say on pay measures have done so to curtail future compensation conflicts with shareholders. Wood sits on H&R Block’s board and has seen first hand what happens when boards offer shareholders the option of an annual vote on say on pay. “[The vote] was brought by the board—not by shareholders, and was not because of poor pay practices. [The board] thought increased communication was keeping with shareholder views,” says Wood. “Because it was put on a proxy, there was an 88 percent favor vote. There will be an annual vote on say on pay.” Wood notes that shareholders did not submit to proxy without permission of the board. The lines of communication were opened and both sides were able to voice their concerns without a proxy battle.
While there are many proponents for say on pay, critics argue that competitive advantage can be hurt with a forced advisory vote. Tharp believes that companies should be encouraged to take matters into their own hands and work toward designing effective pay programs. “[Forced say on pay measures] will erode the centrality pf pay,” argues Tharp. “This may lead to cookie cutter approaches if boards don’t want votes taken.”
Ferlauto believes there already is a cookie cutter approach to compensation. He also argues that the model is already broken and advisory votes are necessary to bring on long-term strategic compensation planning. “Put up a system with regularized communication with shareholders who can vote up or down. That’s the track record that we’ve got out of the U.K.,” notes Ferlauto.
Tharp believes that while shareholders should have increased communication with their boards, he notes that shareholders are more likely to make uneducated guesses. “If you really think a shareholder is going to spend three hours reading and understanding [a CD&A]—that’s not a helpful thumbs up or thumbs down vote,” he argues. Tharp notes that it’s a board’s job to thoroughly read through and understand in-depth documents, such as CD&A’s, while shareholders are less likely to invest the same amount of time.
Ferlauto offers the solution of compensation committees offering a document that is much simpler and shorter—complete with metrics. “[Shareholders] are interested in the efficient use of capital and what is the company’s philosophy of compensation,” says Ferlauto.
How Should Shareholders Assess Pay?
When assessing pay packages, Tharp suggests that shareholders look at a mix of pay. “Too much or all of the long-term stock options produces a significant amount of risk,” notes Tharp. “[Ask whether] there is a blend of performance driven incentive that then have a holding or retention requirement.”
“There has to be a substantial ‘til death do we part’ where equity is held two years past 10 years of retirement,” says Ferlauto. He adds that misusing CEO leverage can hurt a company’s bottomline. “Make sure that those short-term bonuses are exactly that—short-term—and that they are a stepping stone to a longer term [plan],” adds Ferlauto.
“I do believe in delaying equity rewards to be liquidated beyond someone’s tenure,” adds Wood. “People leave [the company] in the best possible situation and best condition.” Transparency allows communication outreach to be widely available for both shareholders and the board.
All three agreed that if a survey, asking the right questions, and with the right amount of transparency, could have a positive impact. Regardless, Ferlauto and Wood believe that say on pay is a useful tool. “Say on pay is more of a scalpel than a hammer—a hammer would be if you were just voting against comp committees,” says Ferlauto. “I think [say on pay] is required for proxy access—there is a marriage of say on pay and proxy access.”
Wood agrees with proxy access and believes that if directors are held accountable, there would not be a need for say on pay. However, Tharp warns that mandating say on pay could hinder business. “We’re going to mandate say on pay even if shareholders of that company haven’t asked for it,” asserts Tharp.