Shareholders Push For Vote on Executive Pay
By Erin White and Aaron O. Patrick
The Wall Street Journal
Monday, February 26, 2007
Some shareholders are angry about soaring executive pay. Soon,
they may get a voice.
Ahead of this year's annual meetings, activist investors have
submitted shareholder proposals at roughly 60 companies seeking
an advisory vote on executive pay, according to Institutional
Shareholder Services. Targets include
WellPoint Inc. and
The vote would be nonbinding, but activists hope that public
censure, or the threat of it, would prompt directors to curb
outsized awards and better link pay with performance. The
proposals come as new Securities and Exchange Commission rules
requiring greater disclosure promise to cast a brighter
spotlight on compensation.
One company facing a shareholder proposal, insurer
Inc., agreed earlier this month to give investors a nonbinding
vote on executive compensation, beginning in 2009. Others,
Corp., are discussing the possibility of similar moves.
This week, U.S. Rep. Barney Frank (D., Mass.), the new chairman
of the House Financial Services Committee, plans to introduce a
revised version of his 2005 bill that aimed to give shareholders
power to veto executive-pay deals. He will hold a hearing next
week on his latest measure, which instead would require advisory
The activists are taking a page from the British. Since 2003,
United Kingdom shareholders have cast advisory votes on
corporate compensation policies and how much they pay
executives. Investors and companies say the practice, which
began after the British government passed a law requiring it for
all public companies, has generated more discussion between
shareholders and boards.
But it hasn't necessarily curbed compensation.
"We have better disclosure and better accountability," says Ian
Jones, head of responsible investment at Co-operative Insurance
Society Ltd., an insurance company with about $40 billion under
management. But "I don't think it's had much effect on the
amount of remuneration."
British CEOs have long made less on average than their U.S.
counterparts, but pay in both markets has risen at roughly
comparable rates in recent years, with some indications pay may
have risen faster in the U.K. than in the U.S. The median
salary and bonus for CEOs at 250 large and mid-size U.K.
companies totaled £610,000 ($1.2 million) in 2005, the latest
year for which data are available, according to the U.K. arm of
ISS. That's up 9.9% from 2004 and 35.6% from £450,000 in 2003.
In the U.S., median CEO salary and bonus hit $2.4 million in
2005, up 7.1% from 2004, and up 13.7% from $2.1 million in 2003,
at 350 large companies studied by Mercer Human Resource
Consulting. The companies in the 2003 and 2005 samples varied
Stephen Davis, a fellow at Yale University's Millstein Center
for Corporate Governance and Performance who has studied the
U.K. experience, says the advisory vote has strengthened the
link between pay and performance. For example, pay consultants
say the practice has pushed British companies to shift executive
compensation toward bonuses and away from big salary increases.
But Mr. Davis says "Investors still feel...that pay is not yet
fully aligned with performance in the way that they would like."
Mr. Davis says companies and investors are on a learning curve,
but he says the vote appears to have helped curb severance
packages. At the start of the decade, a three-year payout was
standard; today, a one-year payout is "virtually universal,"
Mr. Davis says. But he says directors worry that investors
reviewing dozens of pay plans are issuing "cookie-cutter"
judgments rather than evaluating packages individually.
Big U.K. shareholders applaud the increased discussion. Talks,
often held in advance of annual meetings, are "more meaningful"
than the occasional formal presentations managers used to offer
shareholders, says Colin Melvin, head of corporate governance at
London-based Hermes Pension Management Ltd., which manages $120
billion in assets.
For instance, in 2003, 50.7% of votes cast by shareholders
opposed a pay package for
PLC Chief Executive Jean-Pierre Garnier. The pharmaceutical
maker later agreed to overhaul its pay policies and end "what
might be deemed 'payment for failure,'" according to its 2004
letter to shareholders. Dr. Garnier's total pay package fell
slightly in 2004, to $4.56 million from $4.57 million the year
Ahead of the 2004 shareholder meeting, Glaxo sent draft copies
of its compensation report to large shareholders, according to
Richard Singleton, the director of corporate governance at F&C
Asset Management. Mr. Singleton emailed Glaxo's then-chairman,
Sir Christopher Hogg, suggesting tougher performance targets for
executives to earn bonuses. The company added a clause stating
performance targets would consider analysts' forecasts.
"I was delighted," Mr. Singleton says. The clause remains part
of Glaxo's compensation policy.
A Glaxo spokesman confirmed the clause was inserted in the 2004
report, but he declined to comment on the process. Sir
Christopher couldn't be reached.
Talk doesn't always translate into action. Early last year,
London-based investment manager
PLC decided to pay its departing chairman, Charles W. Brady, a
$9 million bonus. ISS's British arm believed the payment was
unjustified, according to director of research David Paterson,
and considered opposing the compensation report.
Amvescap's company secretary, Michael Perman, told an ISS
analyst that executives considered the bonus reasonable because
Mr. Brady had shepherded Amvescap through a tough period and had
hired a new chief executive. The analyst wasn't convinced, and
ISS recommended that investors oppose the compensation report;
at the annual meeting, 48% of votes cast did. Mr. Brady did get
An Amvescap spokesman declined to comment beyond a written
statement from Amvescap Chairman Rex Adams on the day of the
vote: "Over the last weeks, Amvescap has initiated direct
discussions with many of our company's major shareholders, and
we believe we have a good understanding of their views."
Despite the shortcomings, U.K. investors are among those pushing
U.S. companies to adopt the advisory vote. In January, a group
of 13 institutional investors, nine British, wrote SEC Chairman
Christopher Cox to endorse the practice. The group, which
collectively has $1.5 trillion under management, said the votes
would bolster communication between shareholders and directors,
better link pay with performance and "provide a counter-weight"
to rising executive pay. Companies in Australia, Sweden and the
Netherlands also grant shareholders a vote on pay.
In the U.S., the American Federation of State, County and
Municipal Employees union sponsored "say on pay" resolutions at
seven companies last year and 10 so far this year, says Richard
Ferlauto, director of pension and benefit policy for AFSCME.
ISS says the resolutions last year won an average of 40%
support, which is high for new issues.
This year, AFSCME is co-leading a group of companies and
shareholders to discuss the idea. The group includes Pfizer,
Corp., Schering-Plough and
American International Group
Inc., as well as the California Public Employees' Retirement
System and other funds.
Some corporate participants in the group think the concept has
merit, but they worry about the mechanics. One sticking point:
How to give shareholders a voice on elements of a pay package
that companies are legally bound to pay, such as an executive's
deferred compensation? "You create an expectation that you can
do something about it" if investors reject the package, says one
person close to the situation.
Alex Kelly, head of investor relations at Schering-Plough, says
the company is willing to consider letting shareholders vote on
pay. "We're willing to listen," he says.
Other companies oppose the notion. In a statement to be
included in its proxy, Wells Fargo argues that an advisory pay
vote "would provide no clear or meaningful guidance" because
directors wouldn't know which portion of compensation investors
objected to. Shareholders already have plenty of ways to tell
directors what they think, the company states. Wells Fargo also
contends that the U.S. and U.K. corporate systems have
"significant differences in regulatory and corporate governance
policies and practices."
Other companies aim to keep the proposal off the proxy.
WellPoint contended to the SEC staff that the proposal could be
kept off the ballot; SEC rules allow companies to exclude
proposals in some circumstances, including if it's
"misleading." On Friday, WellPoint was notified that the SEC
staff agreed "there appears to be some basis for your view." So
WellPoint will now keep it off the proxy, a spokesman says. A
spokeswoman for proposal submitter Connecticut Retirement Plans
and Trust Funds said it won't try to appeal to the SEC.
Instead, it will support the say-on-pay idea in other ways, such
as by supporting legislation Mr. Frank plans to introduce.
Another company, Northrop Grumman, has also argued to the SEC
that the proposal should be kept off the proxy. As of Friday,
the company had not heard back, a spokesman said.
-- Joann S. Lublin contributed to this article.
Write to Erin White at
and Aaron O. Patrick at