Options Backdating
Shareholders are responding in a variety of ways to problems related to the timing of option grants. The option-timing imbroglio of 2006 has led to greater investor skepticism over the ability of boards to oversee executive compensation. To that end, the Amalgamated Bank's LongView fund has already filed proposals at six companies under investigation for the alleged backdating of options calling on them to reform their option grant policies.

The LongView proposals ask the affected companies to permanently fix grant dates or set dates for making option awards that will be announced before a fiscal year begins. An exception would be made for awards to executives recruited from the outside, provided that the strike price is not linked to the release of material, non-public information that could affect the stock price.

The LongView fund has filed the proposal at Analog Devices, Apple, Brooks Automation, Macrovision, Progress Software, and Sanmina-SCI. The Apple proposal was co-filed by the Connecticut Retirement Plans and Trust Funds while a Teamsters' fund has filed the proposal at Broadcom.

"LongView is having a useful dialogue with some of the companies to which we addressed proposals on options backdating issues," Amalgamated Bank Vice President Julie Gozan said. "The full story on this practice has not yet been written, and we're trying to learn not only how this came about, but what can be done to prevent similar... practices in the future."

LongView withdrew the proposal at Brooks Automation after the company agreed to adopt it. Although the company has generally moved away from options to a stronger reliance on restricted stock, Brooks made a commitment to select a presumptive date for any future option grants. "Their suggestions were good ones. Why wouldn't you do it?" said Thomas Grilk, the company's senior vice president, general counsel, and secretary. "They made good observations and they really were good discussions. We're always delighted with good advice from all quarters."

Pay for Superior Performance
"Pay for superior performance" proposals have already been filed by labor funds at more than 50 companies for 2007, making it the second most frequently filed proposal after majority voting. The proposal--filed for the first time in 2006--broadly calls for companies' compensation committees to establish a pay-for-superior-performance standard in executive compensation plans.

Under the proposal, annual incentives or bonuses would use defined financial performance criteria benchmarked against a disclosed peer group of companies, and no bonus would be paid unless the company's performance exceeds its peers' median or mean performance on the selected financial criteria.

Similarly, the proposal recommends that options, restricted shares, or other equity or non-equity compensation used be "structured so that compensation is received only when the company's performance exceeds its peers' median or mean performance on the selected financial and stock price performance criteria." Finally, the proposal calls for sufficient plan disclosure "to allow shareholders to determine and monitor the pay and performance correlation."

Ed Durkin, corporate affairs director at the United Brotherhood of Carpenters and Joiners, said the union pension fund chose to file such proposals at companies with a "poor link" between pay and performance. The Carpenters fund based its decision on an analysis looking at companies where CEOs made over the median CEO total compensation for their industry and market capital peer group. Performance against industry peers was determined for each company in three categories: total shareholder return for one year compared with industry peers, total shareholder return for three years compared with industry peers, and total shareholder return for five years compared with industry peers.

ISS also is tracking 16 proposals seeking performance-based options, which represents a large increase from last year. Fifteen of these proposals were filed by individual investors, including members of the Steiner and Chevedden families.

SERPs
While shareholder proposals on supplemental executive retirement plans (SERPs) have been filed in recent years, most have focused on seeking investor approval of the plan or additional disclosure of awards. However, a new SERP-related proposal, filed by the Carpenters at 18 companies so far, calls for the compensation committee to establish a "SERP policy" that limits the covered amount to a senior executive's annual salary and excludes all "incentive or bonus pay from inclusion in the plan's definition of covered compensation used to establish benefits."

The proposal was filed only at companies where the current SERP includes such compensation in its calculation measure, Carpenters’ officials say. “Variable pay should not be part of the calculation in providing a lifetime stream of income,” Durkin said. The supporting statement of the proposal expands on Durkin’s comments, noting that, “the inclusion of annual bonus or incentive payments in determining increased pension benefits can dramatically increase the pension benefit afforded senior executives and has the additional undesirable effect of converting one-time incentive compensation into guaranteed lifetime pension income.”

Along with this proposal, resolutions seeking shareholder approval of SERPs have been filed by the AFL-CIO at Raytheon, and by the Laborers' International Union of North America (LIUNA) at Ryland, labor fund sources say. LIUNA reports that it withdrew the proposal at Ryland after the company agreed to change its policies.

Compensation Consultant Independence
As the SEC’s new disclosure rules take effect, and proponents consider next steps in attempts to reform pay practices, the AFL-CIO is revisiting the issue of compensation consultants for the 2007 proxy season. The labor federation's Office of Investment has crafted a proposal, similar to one last filed in 2000, which calls for firms to disclose the company's relationship to any compensation consultants. "The independence of compensation consultants has received little scrutiny, and this is an important next step in the effort to align CEO pay with performance," notes fund official Daniel Pedrotty.

Specifically, the report would identify who hired the consultant (whether it was the board or the company), and whether the firm's senior management participated in the process of selecting or retaining the consultant. The report would also look at the historical relationship, disclosing whether the consultant has provided during the last five years any non-compensation-related services to the company or any affiliate of the company, including services provided by the consultant through an affiliate.

Additionally, the report would disclose whether the consultant has any service contracts with the company's senior management, or with any organizations that the company's senior management is affiliated with, and disclose whether the consultant has other public company clients at which an executive officer of the company or an affiliate of the company serves as a director. Finally, the report would disclose whether the consultant has employees who are family members of any person described above.

The proposal has thus far been filed at Exxon Mobil, General Electric, Home Depot, and Wal-Mart by the AFL-CIO, at DTE Energy by LIUNA, at Washington Gas by the Teamsters, and at CVS by the LongView fund, labor fund sources say.

At least two targeted companies have responded by agreeing to investor demands to enhance disclosure. In late December, General Electric said it would for the first time disclose the full extent of the work performed by its compensation consultant, Frederick W. Cook & Co. The move may prompt other companies to follow suit, proponents say. "GE is setting a precedent that other companies should follow," Pedrotty told Bloomberg News. The AFL-CIO has withdrawn the proposal. In addition, LIUNA withdrew its proposal at DTE after that company implemented the union's recommended changes.

The AFL-CIO said it believes the proposal would survive no-action challenges by companies that seek to omit it from their proxy. In 2000, when the labor fund filed a similar proposal at Washington Mutual requesting compensation consultant-related disclosures, the SEC ruled for the resolution’s inclusion on proxies.

A variation of the proposal also was filed in 2000 at IBM, which the commission allowed the company to omit on the grounds that it requested additional information to be included in SEC filings. The labor fund revised the proposal to ask for a separate report, much as is called for in the draft 2007 proposal.

Additional Proposals
Additional compensation proposals for 2007 include those concerning golden parachute payments and those seeking to cap pay or a report on pay distribution. The number of resolutions seeking shareholder approval for golden parachutes appears to be down slightly in 2006. ISS is tracking just 12 shareholder proposals on this topic for 2007, 11 of which were filed by labor funds. CalPERS has filed a bylaw proposal at Shaw Group and urged other investors to support the resolution at the engineering company's Jan. 30 meeting.

"Historically, [the company’s compensation committee] approved some of the most egregious severance and change-of-control provisions ever to catch the attention of CalPERS,” Christianna Wood, the pension fund's senior investment officer for global equity, wrote in a letter to Shaw Group shareowners.

ISS is currently tracking seven proposals seeking to recoup or "clawback" executive bonuses in the event of a restatement, six of them filed by members of the Steiner family. CalPERS has so far filed one such proposal and plans to file between five and eight more. ISS tracked 10 clawback proposals that came to a vote during the first half of 2006 with average support amounting to 23.6 percent. That figure is down from 2005, when the average support was 31 percent at four companies.

Shareholder activist Evelyn Y. Davis tells ISS she also plans to file proposals seeking to abolish stock options at Verizon Communications, Goldman Sachs, and Bank of America, among others.