Is Support for Say on Pay Waning?

Despite recent decisions to give investors non-binding votes on how executives are paid at companies such as Abbott Laboratories and Motorola, this year’s numbers for advisory pay resolutions are about the same as last year, according to the Chicago Tribune. RiskMetrics reports that support for advisory pay is an average of 43 percent. At 10 of 16 companies where say-on-pay proposals were considered for a second year, they received fewer votes.

"There definitely was an expectation that momentum was going to continue to grow," said Carol Bowie, head of RiskMetrics' Governance Institute. "Instead it seemed to have stalled. But it would be premature to say the issue is over and gone." These numbers represent the overall lack of agreement of what is the best way to curb excessive payouts. The idea is to link compensation closer to performance.

Directorship reported on a study conducted by Mercer which based its findings on the proxy filings of 350 companies within the Fortune 1000. Overall the study found that CEO total direct compensation declined in 2007. Forty-two percent of companies did not increase their CEOs’ base salaries.

In response to shareholder concerns that pay be linked to performance, more performance-based long-term incentives gained popularity. Directorship reported on a recent Equilar study which found that executive performance targets were on the rise. Sixty-eight percent of companies disclosed specific performance targets that executives were required to meet in order to receive their payouts.

Moody’s Investors Service, whose bond ratings affect borrowing costs, adopted a guideline last year in which CEO pay should not exceed three times the average of the other executives named in the proxy. Michael Kesner, principal with Deloitte Consulting’s human capital practice, said, "They feel it reflects poorly on governance because paying more must suggest the CEO has undue influence on the board."

In 2006, the Securities and Exchange Commission required a more-detailed executive pay disclosure. As a result, payouts such as severance packages have been held under closer scrutiny. Disclosing company targets to the SEC has been an on-going process. Kesner believes that the major battle being waged between companies and the SEC staff, are target disclosures. He said, “Most of my clients disclose targets, but I have others that don’t and won’t until they’re forced.”

Perquisite disclosures have also not declined dramatically as studies show that companies believe that certain perquisites are necessary. Perquisites such as corporate jet use, financial advisory services and home security systems are viewed as necessary to retain an executive team.

As political elections continue in the United States, advisory votes are also a hot topic. In countries such as Great Britain, advisory votes are mandatory. While some corporate governance experts believe there is a stall, others disagree. Timothy Smith, senior vice president at Walden Asset Management, and a say-on-pay proponent, believes that say-on-pay is continuing to build momentum. "Whenever you get over 40 percent of the vote, the board has received a very strong message," he said.

Activists suggest that companies with the highest paid executives take a further look into the chairs of the compensation committees. The mounting concern is that companies are comparing executive salaries to peer companies without also comparing performance.