January 30, 2007
"Say on Pay" Highlighted in the Upcoming 2007 Proxy Season
by Anne Moore Odell
Institutional investors band together, asking for the right to weigh in on top executive
It seems like simple logic: an executive’s compensation should reflect the job she or he is
doing at the corporation she or he works for. However, in many cases, executive compensation
packages have not mirrored the performance of US corporations. Many shareholders are fed up with
this discrepancy between executive compensation and corporate earnings. And what’s even more
maddening for these investors, under current law shareholders have no say in helping decide
Two groups have recently asked US companies and the SEC to
reconsider their closed stance on investor involvement with executive review and compensation. A
network of 41 US institutional investors recently announced the filing of shareholder resolutions
at 44 major US companies asking companies to grant shareholders an advisory vote on executive
compensation packages. At the same time, an international group of funds wrote to the SEC
requesting advisory votes on executive pay at US companies.
The US network was woven
together by the American Federation of State, County and Municipal Employees (AFSCME) Pension Plan and Walden Asset Management. These
institutional investors include public pension funds, labor funds, asset managers, foundations, and
members of Interfaith Center on Corporate Responsibility (ICCR).
Although the group is manifold, their resolution is single: "an annual, non-binding advisory vote
on the summary compensation table that every corporate board presents to investors in its yearly
Companies received the resolution because institutional investors felt
that their executive pay has been markedly excessive or because the gap between corporate
performance and executive pay especially egregious over the past three to five years. Citigroup,
Coca-Cola, Exxon Mobil, Home Depot, Jones Apparel, Merck, Nabors, Pfizer, Qwest, Time Warner,
UnitedHealth, and Wal-Mart are a partial list of companies who received the resolution.
Timothy Smith, Senior Vice President of Walden Asset Management and President of the Social Investment Forum shared his views with SocialFunds.com on the
"say on pay" resolutions. "The vote will give investors an opportunity to send a message to the
Compensation Committee about the scale of the compensation package as well as its link to
performance. The other option unhappy investors have chosen in the past is voting against Directors
serving on the compensation committee."
Although the SEC has new rules in place to expand
disclosure of CEO compensation, this group of institutional investors argues the current law does
not address excessive executive compensation. Some investors believe that the new disclosure laws
might actually lead to higher pay for top executives as they demand what peers are making. The
institutional investors who filed the resolutions concerning executive compensation are counting on
shareholders voting this 2007 proxy season to agree that disclosure of compensation is not enough
and shareholders’ voices need to be listened to when creating executive compensation tables.
"These rules are exceedingly important to get a full view of executive compensation, but as the
SEC Chair Cox has stated, the SEC's role is to provide information for investors," Smith explained
to SocialFunds.com. "It is up to the markets to act to provide checks and balances on
"Shareholders expect compensation committees to establish appropriate
measures that tie
executive pay to company performance," said Connecticut Treasurer Denise L.
Nappier. "Far too many compensation plans are fashioned in such a way that executives are rewarded
regardless of long-term return on investment. An advisory vote gives shareholders the opportunity
to let compensation committees know when they’re not making the grade," she added.
Currently, companies in the United Kingdom, Australia, Netherlands and Sweden allow
shareholders to cast advisory votes on executive compensation. The UK law has been in place since
2002 and has restrained the growth of executive compensation packages.
With the positive
experiences of the UK in hand, a group of institutional investors from the UK, the US and Europe
sent a letter to SEC Chairman Christopher Cox. The letter stated that a non-binding vote on CEO pay
would let shareholders tell companies how they feel about the jobs executives are doing.
The international group listed many benefits advisory votes have played in UK and other
international markets. For one, the dialogue between companies and investors has been valuable to
both parties, they wrote in the letter to Chairman Cox, with companies using longer-term
performance targets in their compensation plans. Secondly, they said that many of Britain’s largest
companies are moving from CEO salary to performance-based pay, which they attribute in part to
Some US companies have already started to respond to investors’ requests
to have a "say on pay." "Companies like Pfizer and Schering Plough have stated this concept has
real merit and they plan to work with others to study how this could be implemented in the U.S.
markets," Smith told SocialFunds.com.
As major investors join together and learn the power
of working for shared goals, the effects are long reaching. As Smith reported "Certainly this
[network] will strengthen working relations between investors focusing on governance and those
focusing on social/environmental issues."