As Round One comes to a close in the latest tussle over executive pay, it’s hard to find any winners. The newest hot fix for bloated compensation left a handful of companies bruised and prodded a few more into modest changes but hasn’t yet triggered the sea change some advocates would like.
The fix in question is “say on pay,” adopted with great fanfare as part of the Dodd-Frank financial reform act—which was in part a reaction to public outrage over fat executive paychecks and high-profile Wall Street bonuses in light of the financial crisis, massive government bailouts, and soaring unemployment. (The anger hasn’t abated. A recent poll found that 65 percent of Americans are mad about big corporations’ profits while the economy stagnates.) Disarmingly simple, the say-on-pay measure requires companies to seek shareholder approval for compensation of their chief executives and four other top officers. Under regulations adopted in January, or in anticipation of them, most publicly traded companies asked investors for a simple yes-or-no vote on existing pay packages in proxy filings for their annual meetings.
The fix in question is “say on pay,” adopted with great fanfare as part of the Dodd-Frank financial reform act—which was in part a reaction to public outrage over fat executive paychecks and high-profile Wall Street bonuses in light of the financial crisis, massive government bailouts, and soaring unemployment. Disarmingly simple, the measure requires companies to seek shareholder approval for compensation of their chief executives and four other top officers. Under regulations adopted in January, or in anticipation of them, most publicly traded companies asked investors for a simple yes-or-no vote on existing pay packages in proxy filings for their annual meetings.
Among the highest-profile flops: Nearly 52 percent of shareholders voted against pay practices at tech giant Hewlett-Packard, where CEO Leo Apotheker was given a package totaling $3.6 million in salary and bonus, $8.6 million in one-time cash payments, 200,000 shares as a sign-on bonus, and the potential to earn 700,000 shares (and possibly more) when he joined the company late last year. Institutional Shareholder Service and competing proxy adviser Glass, Lewis & Co. blasted the company for failing to link pay to performance, among other criticisms. At mutual-fund shop Janus Capital Group, slammed by GovernanceMetrics International for a range of pay issues, “no” votes topped 59 percent. CEO Richard Weil’s pay package totaled $20 million last year even though the company’s investment results suffered. And 62 percent of shareholders of tool-maker Stanley Black & Decker voted against its pay practices, amid criticism over big perks and a pay hike for CEO John F. Lundgren.
With just over 2,000 annual shareholder meetings so far this year, the vast majority of pay packages won approval, often with 90 percent of the vote or more. As of late last week, shareholders at just two dozen companies rejected existing pay arrangements, according to a tally by Mark Borges, a Washington, D.C.-based compensation consultant with Compensia Inc.
The votes are merely advisory, but advocates hoped the ballots would shame companies into reining in outsize pay, especially where corporate performance has lagged-- either ahead of potentially contentious votes or after the proxy measures failed. Firms hired to advise major shareholders advocated “no” votes in dozens of cases. ISS, an influential advisory firm, recommended rejection at roughly 1 company in 10.
Corporate boards aren’t known for moving quickly or deliberating openly, and only a few have said much in the face of a shareholder rebuke, beyond vaguely promising to take the results seriously. An H-P spokesman said the company was “disappointed with the outcome” of the vote and “intends to carefully consider our shareholders’ perspectives regarding executive compensation matters.”
A spokesman for Janus, the mutual-fund company whose shareholders rejected its pay practices with 60 percent of the vote, declined to say what the company would do, other than avoid the kind of big one-time stock grants that drew criticism this year. “We’ve been working with our board on implementing some responsive,” James Aber of Janus said. “We’re confident that shareholders will find improved accountability in our compensation going forward.”
After investors cast more than two-thirds of their shares against pay practices at energy and oilfield services company Helix Energy on May 11, the company promised to implement “defined performance metrics” for this year’s cash bonus program and to modify long-term incentive pay “to include additional pay for performance elements in future grants.”
Less clear is how companies will react in the face of rejection or sizable shareholder resistance. At drug maker Johnson & Johnson, its say-on-pay measure passed, but with a 39 percent “no” vote. It has promised unspecified changes. Investment bank Lazard Ltd. saw its say-on-pay measure approved with just 53 percent of the vote, while at drug maker Pfizer, 56 percent of shares were voted in favor of existing executive pay practices.
But that doesn’t mean directors can afford to ignore the verdict. After all, this year’s say-on-pay opposition can become next year’s vote to unseat members of the board if shareholders remain unappeased--or, as one corporate publicist noted, if ISS remains unsatisfied. Most companies didn’t return calls seeking comment.
A few companies appeared to head off losses with modest changes to their pay practices ahead of a vote. General Electric added new performance thresholds to stock options it had already granted CEO Jeff Immelt after what it called “constructive conversations with our shareowners.” Disney eliminated a perk that would pay taxes for executives terminated after a merger. At both companies, a little more than 75 percent of shares were voted in favor of the revised packages.
Not all companies have been so accommodating in the face of opposition over their pay practices. On June 3, GameStop, a video-game retailer, sent an 1,800-word letter to its shareholders urging them to ignore a “no” vote recommendation by ISS and accusing the proxy advisory firm of spreading “inaccuracies and misconceptions.” GameStop holds its vote on June 21.
Even before ISS made a recommendation on Allstate’s pay practices, the insurer on April 19 disclosed a four-page letter to the proxy adviser taking issue with its expected objections. The company followed up with a short robo-call to shareholders from the company’s corporate secretary and a three-page letter saying a “no” recommendation from an unnamed proxy adviser was “based on incorrect or no analysis.” On May 17 shareholders narrowly approved Allstate’s pay practices, 52 percent to 43 percent.
An Allstate spokeswoman said the company’s board will discuss the vote at its July meeting and “thoroughly analyze the issues and external environment in consultation with its advisors,” an analysis that could continue over several meetings.
Compensation consultants say Allstate, along with other companies that successfully bucked “no” recommendations, left an impression: A focused campaign by the company can beat back even an organized effort to reject pay packages. With most companies facing another vote on the subject next year, that may prove to be the lesson companies take away from this first season of say-on-pay, says Borges of Compensia.
Theo Francis is a senior reporter at footnoted.com, a publication of financial information company Morningstar Inc. that analyzes corporate disclosures.
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