Executive compensation and perceived abuses of the system by some companies have continued to put compensation committees under the microscope.
Even high-flyers such as Apple (where Steve Jobs receives $1 per year in compensation) are not immune from shareholder proposals to require an advisory vote on executive pay. In all, about 80 companies have independent shareholder proposals in their proxy statements this spring advocating that shareholders be given an advisory vote on the company’s executive compensation program. Last year, there were
about 60 such “say-on-pay” proposals, with eight receiving majority votes and an average favorable vote of about 42 percent.
The business community remains, for the most part, skeptical about providing say on pay to shareholders. The corporate response, put forth at a recent meeting by the Center on Executive Compensation, is that executive pay is already becoming more transparent and aligned with performance; compensation committee governance has improved; pay practices have been responsive to shareholders; current methods for obtaining input from shareholders are appropriate and better than a non-specific, unfocused negative vote on pay; and say on pay will further boards’ reluctance to tailor pay plans to specific situations and to differentiate pay for performance. In other words, say on pay would cause compensation committees to dumb down their pay plans to meet the voting guidelines of proxy advisory firms, whose power would be further enhanced by the requirement for such a vote.
Say-on-pay opponents have reason to be optimistic. Despite the number of proxy proposals on the issue this year, I believe the momentum for say on pay is waning, with the average vote in favor trending lower than last year. For example, shareholders at Citigroup rejected a say-on-pay proposal, with 38 percent of shareholders voting in favor of it. That number is down from 46 percent support last year, according to RiskMetrics, a proxy advisory and research firm. A similar proposal at Merrill Lynch garnered support from 36 percent of its proxy voters, down from 46 percent last year. If this trend continues, the business community may conclude it has prevailed and turn its attention to other matters. This could prove to be a serious mistake.
The reason corporate directors and executives would be unwise to put say on pay on the back burner is that a mandatory proposal will likely be introduced into the next Congress after a new president is inaugurated, regardless of its momentum in the private sector. Such a proposal would have broad populist support and could be passed and signed into law rather quickly, possibly going into effect as early as 2010, according to some estimates.
Consider the following implications if say on pay becomes law: A mandatory requirement would be imposed on all 10,000 or so U.S. public companies; it would be an annual ritual continuing for an indefinite future; and the language of the resolution that shareholders would be asked to approve may not be to the business community’s liking.
A legislative solution would be a burdensome and expensive outcome. Like Sarbanes-Oxley, it would be imposed on the entire business community, while ostensibly targeting only a small portion of companies whose egregious executive-pay actions arouse the attention of the shareholder activists, abuse the public trust, and bring discredit to the justifiable actions of the vast majority.
One way to prevent a legislative outcome is a voluntary say-on-pay initiative that would negate the attention of shareholder activists and diffuse populist support. To do this, however, the voluntary initiative would have to encompass the small number of companies whose executive-pay programs and actions are out of line with community standards and
evolving best practices. But these are just the companies who, in fear of losing, would not voluntarily submit their programs to a shareholder vote. So, how can we avoid a mandatory requirement for say on pay while still providing shareholders with the leverage to address the abusive actions of a few outliers?
One idea might work because it has rewards and penalties for companies and allows the bad actors to be targeted and brought to account. The proposal would make say on pay a listing requirement on exchanges where U.S. companies’ shares are publicly traded. Unlike a legislative solution that would mandate annual say-on-pay resolutions for all U.S. public companies, however, this proposal would continue the current two-pronged voluntary approach to say on pay. Specifically, there would be no requirement that all companies submit their executive pay programs to an advisory vote every year. Shareholders could continue to submit independent resolutions asking for say on pay. A company could also voluntarily submit its program for approval by an advisory vote of shareholders, as Aflac has just done.
In any case, what happens as a result of the outcome of the vote would likely be as follows:
