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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 compensation packages.

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 executive paychecks.

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 proxy statement."

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 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 "It is up to the markets to act to provide checks and balances on compensation."

"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 advisory votes.

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

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."


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