Rein in pay

Although there is often considerable media coverage following executive pay awards - and resulting market criticism - say on pay resolutions have yet to reach widespread support. Lauren Keane explains why

This was supposed to be the year in which shareholders took back the reins and scored a point for executive accountability, striking out against corporate leaders who reaped huge compensation packages, even as their companies floundered. This was supposed to be the year of say on pay.

But the reality has been more muted - neither a total success nor a complete flop. Supporters and opposition alike say the result is, in fact, a good sign for the current state of executive compensation in US companies.

Support has remained flat year on year at most of the more than 90 companies whose shareholders are seeking a non-binding, advisory vote on executive compensation packages. Despite market conditions ripe for such changes, advocates of the proposals haven't been able to secure the support they need to pass more than a handful of the measures - nine so far, compared with eight last year - as proxy season winds down. Overall, percentage support for say on pay proposals at companies holding such votes is in line with last year's figures - about 43%.

'That's still a very strong vote, even though it didn't get a majority,' says Steven Heim, director of social research at Boston Common Asset Management, one of the firms that has sponsored a number of this year's say on pay resolutions. He says they are continuing with the campaign and expect further gains next year.

Scant support

At the last available count, support for say on pay had actually declined for the second year in a row at 10 of the 16 companies holding such votes. Many of those were financial services firms, where support has been especially weak this year.

That surprised some say on pay advocates, who expected to win over shareholders at companies that had been hit hardest by recent market troubles, including Wachovia, Merrill Lynch, Morgan Stanley and Citigroup. But some analysts say that, contrary to popular logic, tough times may have actually contributed to the proposal's defeat.
'At some point, shareholders toggled from being angry about the issues, to being really scared about the survival of these companies,' says Risk Metrics director Patrick McGurn. 'So there was some circling of the wagons at most of these firms, which hurt support for issues such as say on pay.'

So far only one company, insurance company AFLAC, has weathered a full say on pay vote this year. In an eagerly awaited result to which many media analysts pointed as a bellwether, 93% of shareholders approved the proposed pay package for chief executive Dan Amos, during whose 18-year tenure stock prices rose an average of 22% per year.

But AFLAC isn't necessarily the best test case. AFLAC has weathered the market downturn better than most, so there's no immediate reason shareholders should be turning their thumbs down on his compensation. And AFLAC has a long history of good shareholder relations, so offering shareholders a chance to approve compensation plans was a natural extension of that goodwill.

Still, the publicity has been good for AFLAC, which moved up its voting timeframe so it could claim to be the first company to follow through on its say on pay promise. But even Amos himself doesn't think say on pay is the right move for all companies.

Analysts cite several possible reasons for the weak support so far. One is that the Securities and Exchange Commission's (SEC) new stringent requirements for disclosing executive compensation may lessen the perceived need for say on pay votes. Disclosure requirements went into effect in late 2006 and require companies to make public a slew of detailed information on how top executives are compensated. Shareholders may believe that this is enough of a check on executive compensation for the short term.
The SEC is paying close attention to effectiveness. When it found late last year that companies weren't following the new requirements closely enough, it called for more information so that shareholders could get a clearer picture, and that seems to be working. According to analysis by Equilar, an executive compensation benchmarking firm, the number of firms detailing specific performance targets that executives must meet rose 10 percentage points from 2006 to 2007 - to 66.4%.

A few months ago, the mood in the US was decidedly different. There was talk of Sarbanes-Oxley-style regulatory measures to give shareholders a more direct say in executive compensation. The US House of Representatives passed a bill last year that would have required companies to adopt some kind of say on pay framework: Democratic presidential candidate Barack Obama introduced an identical bill in the US Senate, but it has since stalled.

Companies probably haven't heard the last of such legislation. Both political parties in the US are promising to make executive compensation a presidential campaign issue heading into November. Both Obama and Republican presidential candidate John McCain have targeted executive pay in recent public speeches, hoping to capitalise on recent market woes and a growing mood of economic populism.

As McGurn predicts: 'I'd give it a better than 50-50 chance - even better if Barack Obama is elected - that we'll see a shareholder bill of rights legislation in the first 100 days of a new administration, and it will pass by wide margins in both houses of Congress and likely be signed into law.'

Follow the leader

Other countries are ahead of the US in moving in that direction. The UK has mandated non-binding shareholder votes on executive compensation since 2002. Australia, Sweden and the Netherlands also have legal provisions that give shareholders a formal say in approving compensation packages. Say on pay advocates would like the US to follow that lead. '[New SEC disclosure requirements] are a step in the right direction, but we're encouraging them to look towards what the UK is doing as far as requiring companies to allow shareholders these votes,' says Heim.

McGurn and others argue that that's not necessarily the best outcome. 'A one-size-fits-all approach to the issue will eliminate a lot of the creativity we've seen to date,' he says. 'It would create a rote annual process that wouldn't be as meaningful as if boards were allowed to tailor the resolutions to their own companies.'

Another reason analysts cite for weak support for say on pay may be that market forces are acting correctly to bring down skyrocketing executive pay on their own. 'Short-term annual incentive bonuses [in 2007]… were down for S&P 500 companies, both in terms of their prevalence and their value,' notes Alexander Cwirko-Godycki, an Equilar research manager. 'So there's evidence to support that at least some elements of pay that should be connected to performance - short-term bonuses - really are connected in the companies' thinking.'

The same held true for total executive pay. As Equilar's chief executive and founder David Chun wrote in his blog, when Equilar surveyed changes in executive pay for 2007, 'The results didn't quite rock anyone's world. At the end of the day, an increase in chief executive pay of 1.3% in 2007 was pretty tame, especially in light of the financial performance of S&P 500 companies over the same time period.'

Assuming those figures are correct, they suggest that companies are already tying executive compensation more closely to company performance, one of the original goals of the say on pay movement. Of course, some say on pay advocates argue that the goal isn't just to bring down skyrocketing pay packages, but to give shareholders a larger, more active, role in the workings of the companies in which they invest. That's part of a significantly larger debate in the US about what, exactly, these initiatives are expected to accomplish - and what constitutes success.

If it's true that companies are already responding to market pressure on executive compensation, then this year's results haven't provided much clarity on say on pay's viability as a larger shareholder movement. The industry may have to wait until next proxy season, perhaps under different market conditions, for a clearer picture.

Lauren Keane is a journalist based in Washington DC.