“Say on Pay” Gets 51% Support at XTO
Submitted by: Ted Allen, Publications
A shareholder resolution seeking an annual advisory vote on compensation received 51 percent support at XTO Energy, proponents said. The vote is the 16th majority vote for a “say on pay” proposal so far this season, up from 11 during all of 2008, according to RiskMetrics Group data.
The proposal at Fort Worth, Texas-based XTO was filed by TIAA-CREF’s College Retirement Equity Fund. Other recent “say on pay” results include 53.5 percent support at Pulte Homes, 49.6 percent at Frontier Communications, 47.5 percent at Colgate-Palmolive, and 46.5 percent at Allstate, according to proponents. A pay vote proposal also received 47 percent support at Altria, up from 37.1 percent in 2008, proponents said. The worst showing so far was a 12.6 percent vote at Ford Motor; the automaker has a dual-class equity structure that gives the Ford family 40 percent of the voting power.
Overall, pay vote proposals have averaged 46.6 percent support this year at the 44 meetings where preliminary or final results are available, according to RiskMetrics data. These results are based on the votes cast “for” and “against” and don’t include abstentions.
Also at XTO’s May 19 annual meeting, there was 49 percent support for a proposal that seeks shareholder approval of future executive death benefits, according to the proponent, the Amalgamated Bank’s LongView fund. According to the company’s proxy statement, the heirs of CEO Bob Simpson are slated to receive a $144 million package, but XTO has negotiated a new employment agreement that would reduce those benefits by $60 million after June 1.
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Thursday, April 16, 2009 |
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AFL-CIO Denounces Pay Practices
Submitted by: Ted Allen, Publications
The AFL-CIO has launched its “2009 Executive PayWatch” Web site that highlights what the labor federation views as the 10 “worst” corporate pay practices.
“Americans are rightly angered by CEOs who haven’t learned their lesson,” AFL-CIO Secretary-Treasurer Richard Trumka, said in an April 14 press release. “After driving the economy into the ground and gambling with the nation’s retirement savings, these same corporations are giving out huge bonuses for bad behavior.”
Among the pay practices criticized by the AFL-CIO are:
--SunTrust Banks’ plan to grant $7.7 million in stock options to CEO James Wells. The company has received $4.9 billion in federal support from the Troubled Asset Relief Program.
--The more than $500 million in salaries and retention payments paid by American International Group to senior employees since the company was rescued by the federal government, which has spent $170 billion to keep the insurance company operating.
--The changing of performance goalposts, such as the steps taken by homebuilder Toll Brothers after it became clear that CEO Robert Toll would not receive a bonus under the old standards. According to the AFL-CIO, the company now ties the CEO’s bonus to a percentage of its income before taxes and bonus, as well as “squishy” factors, such as “management enhancement and efficiencies, and financial market visibility and access.”
--“Lavish” perquisites, like the $400,000 in tax preparation and financial planning services provided to Ray Irani, the chief executive of Occidental Petroleum.
--“Golden coffin” benefits, such as the more than $40 million in stock, life insurance, and other benefits that the heirs of Shaw Group CEO James Bernhard would receive if he dies.
--“Golden parachute” benefits, such as the $14 million exit package that Richard L. Bond was to collect after stepping down as chief executive of Tyson Foods in January.
In addition, the AFL-CIO has filed 17 proposals this year that seek advisory votes on compensation, investor votes on death benefits, more disclosure on compensation consultants, hold-through retirement rules for equity grants, and other pay reforms, according to RiskMetrics Group data.
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Thursday, March 12, 2009 |
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“Say on Pay” Gets 62% Support at Hain Celestial
Submitted by: Ted Allen, Publications
Hain Celestial investors gave 62 percent support to a “say on pay” proposal at the natural food company’s March 11 annual meeting, according to Walden Asset Management, one of the proponents.
The vote surpassed the 45.6 percent support for “say on pay” at Hain in 2008, and is one of the best showings by a shareholder proposal seeking an advisory vote on executive compensation, trailing only the 67.5 percent vote at Sun Microsystems in November, and the 69.6 percent support at Activision in 2007.
After the Hain vote, Tim Smith, a senior vice president at Walden, said proponents will ask the Melville, N.Y.-based company to implement the proposal. Nineteen U.S. issuers have voluntarily agreed to hold annual advisory votes, while several hundred federally supported financial firms will be required to do so this year.
Hain, which took a $20.5 million restatement to account for misdated stock options from 1993 to 2005, has faced investor dissent over its pay practices. In 2008, four compensation committee members received more than 38 percent opposition.
Also this week, a Walden pay vote proposal won 42.3 percent support (based on the votes cast “for” and “against”) at Walt Disney, according to proponents. That result is comparable to the 42.7 percent average support for “say on pay” resolutions at more than 50 U.S. companies in 2008. The March 10 vote at Disney presumably would have been higher but for the media-and-entertainment firm’s relatively large (7.9 percent) insider voting block.
Recent vote results suggest that advisory vote proponents are gaining more support, but they may face a steeper climb at larger firms. Hain has a market capitalization of $476 million, and Sun Micro has a $3.4 billion market cap, while Disney has a stock value of $30.8 billion. Earlier this year, “say on pay” proposals won 44.3 percent support at Deere & Co. ($12 billion market cap) and received a 38 percent vote at Walgreen ($22 billion). However, Smith cautioned that it may be too soon to reach such a conclusion, given the small sample size and the limited proposal filings at small-cap firms.
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Tuesday, January 27, 2009 |
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Occidental Agrees to Hold Annual Pay Vote
Submitted by: Ted Allen, Publications
Occidental Petroleum, which has faced shareholder dissent over its pay practices, has agreed to hold an advisory vote on compensation at its 2010 annual meeting and support federal “say on pay” legislation.
“We welcome ongoing input from our stockholders. Oxy's Board of Directors strives to maintain an ongoing, constructive dialogue with the goal of achieving continuous improvement in all aspects of our corporate governance, including executive compensation,” Ray R. Irani, the company’s chairman and chief executive officer, said in a Jan. 26 press release.
In response to the company’s decision, the Needmor Fund and various Catholic groups agreed to withdraw their resolution seeking an advisory vote. A Needmor “say on pay” proposal received 44.4 percent support at Occidental in 2008. The AFL-CIO and the American Federation of State, County, and Municipal Employees also withdrew 2009 resolutions that seek a “hold until retirement” policy for executive equity incentives and a vote on future “golden coffin” benefits.
“Allowing shareholders to provide input on executive compensation packages is more important than ever in the current economic environment,” Daniel F. Pedrotty, director of the AFL-CIO’s Office of Investment, said in the company’s press release.
Los Angeles-based Occidental is the 14th U.S. company to agree to an annual “say on pay” vote or permit shareholders to vote to establish that process (which Hewlett-Packard plans to do). In addition, Schering-Plough has said it will survey investors on its pay practices.
In addition to the shareholder proposals, it appears that investor dissent over Irani’s past compensation may have prompted Occidental to hold an advisory vote. Pay committee members received at least 24.5 percent withhold votes last year and faced 35 percent opposition in 2007. Irani has been one of the highest-paid U.S. chief executives; he received $34.2 million in total compensation in 2007 and $59.05 million in 2006.
Investors plan to file more than 100 “say on pay” proposals this year. Those resolutions went to a vote at 79 companies in 2008 and averaged about 42 percent support, according to RiskMetrics Group data.
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Friday, January 23, 2009 |
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“Golden Coffin” Proposal Gets 42% at Johnson Controls
Submitted by: Ted Allen, Publications
In the first vote of its kind, a shareholder proposal seeking a vote on executive death benefits received 42 percent support at Johnson Controls, according to preliminary results released by the proponent, the labor-affiliated Amalgamated Bank.
Scott Zdrazil, a vice president with Amalgamated, said the vote is a “strong sign of shareholder concern.” The bank’s LongView funds, the AFL-CIO, and other labor investors have filed similar proposals targeting “golden coffin” arrangements at 13 other firms, including Shaw Group, which holds its annual meeting on Jan. 28.
The Jan. 21 vote at Johnson Controls, a Wisconsin-based maker of automotive, building efficiency, and power products, is a good showing for a first-time proposal. The vote also is comparable to the best results posted last year by investor resolutions seeking limits on tax gross-up payments.
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Friday, December 5, 2008 |
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New Study on Tax Gross-Ups
Submitted by: Carol Bowie, Head of Governance Institute
A new RiskMetrics Group study, “Gilding Golden Parachutes: the Impact of Excise Tax Gross-Ups,” by analyst Kosmas Papadopoulos, sheds light on a long obscured aspect of executive pay.
The Securities and Exchange Commission’s 2006 compensation disclosure rules lifted the veil on such benefits by requiring companies to estimate potential severance payments, including any tax gross-ups, in their annual proxy statements. These gross-ups are designed to eliminate the impact of a 20 percent penalty (excise) tax that is levied on change-in-control related severance payouts to executives that are deemed to be “excessive.”
Congress enacted the tax in 1984 in an attempt to put the brakes on what were then considered unjustifiably large payouts (though paltry by today’s standards) being made to top executives who lost their jobs after takeovers. But RiskMetrics’ study of S&P 500 companies found that, in fact, the regulation has likely spurred the growth of severance packages, as more and more companies have agreed to pay the penalty tax--and pass that expense onto shareholders. Key findings from the study include:
* A substantial two-thirds of the S&P 500 disclosed they would provide excise tax gross-ups to one or more top executives. That’s in spite of the fact that excise tax gross-ups are a costly benefit, since it generally takes at least $2.50 and as much as $4 to cover each $1 of excise tax that must be “grossed-up.”
*At 80 percent of these companies, the tax would have been triggered if the executives had received change-in-control severance at the end of the prior fiscal year--in other words, the company disclosed its estimates of the tax hit. The aggregate potential gross-up payments for all named executive officers at those companies averaged $13.9 million. And their total estimated severance, including tax gross-ups, averaged a staggering $78.4 million.
* The story was different for the one-third of companies not providing excise tax gross-ups--average total potential severance payouts to the “top five” executives at these firms was $43.9 million.
The huge gap ($34.5 million) between the average value of top executive severance packages at companies that do provide tax gross-ups, versus those that don’t, cannot be explained by the average value of the gross-ups alone ($13.9 million). This finding suggests that companies providing such gross-ups tend to pay higher change-in-control-related severance generally, likely not what Congress intended back in 1984.
Shareholders have been pretty tolerant of these arrangements, but that might change now that more details are available on a regular basis. And, although the government may appreciate the revenue stream from the penalty tax, Congress may also take note of the unintended consequences of that attempt to control executive pay.
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Monday, November 10, 2008 |
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RiskMetrics’ Governance Exchange to Hold Webcast on Say-on-Pay on November 12
Submitted by: Sarah Cohn, Communications
The debate on say-on-pay votes at U.S. companies continues unresolved. Support for the concept this year by investors voting on shareholder proposals requesting say-on-pay was virtually even with 2007, including majority votes at 10 companies. So far, 11 firms have or will put management resolutions seeking an advisory vote on pay on their ballots, but it appears the item won’t become widespread until Congress acts.
RiskMetrics Group’s Governance Exchange will discuss the likelihood and impact of such legislation in a webcast to be held on Wednesday, November 12 at 1 p.m. EST. Speakers for the webcast, include: Richard Ferlauto, Director of Corporate Governance and Pension Investment at the American Federation of State, County and Municipal Employees (AFSCME); Charles G. Tharpe, Executive Vice President for Policy at the the Center on Executive Compensation; and Christianna Wood , Chief Executive Officer of Capital Z Asset Management and H&R Block Board Member, and . In addition, the panelists will debate the effectiveness of say-on-pay votes in addressing perceived problems with U.S. executives’ compensation. Carol Bowie of RiskMetrics’ Governance Institute will moderate the webcast.
To register for the webcast, please visit here.
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Wednesday, October 29, 2008 |
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Schering-Plough Will Survey Shareholders about Pay
Submitted by: Carol Bowie, Governance Institute
Schering-Plough announced on Oct. 24, 2008 that it will conduct a shareholder survey on director and executive pay. The survey will be mailed to shareholders with the company’s 2009 proxy materials, and results will be discussed in the CD&A section of the proxy statement for the 2010 annual shareholder meeting.
Schering-Plough says the survey is intended to “inform future work of the Compensation Committee and the Board” by providing a window into shareholders’ views of the executive pay program.
“This survey is evidence of our commitment to seek and consider shareholder input, as we did in 2006 with the shareholder survey on majority voting for directors” said Pat Russo, Chair of the Nominating and Corporate Governance Committee of the Board, in the company’s press release. Indeed, the company conducted a shareholder survey on governance issues after its 2006 annual meeting, which led to inclusion of two management proposals to amend the bylaws on the ballot for the 2007 meeting: one was to eliminate certain supermajority vote requirements, and the other was to elect directors by majority vote rather than plurality. The first proposal passed, but the second did not, although the board subsequently amended the bylaws to include a director resignation policy, triggered if a nominee in an uncontested election fails to receive support from a majority of votes cast.
It appears that the 2006 survey was conducted by an independent consultant rather than being mailed to shareholders with the proxy statement. For the executive pay survey, Rich Koppes, former General Counsel of the California Public Employees’ Retirement System (CalPERS) and currently of counsel to Jones Day law firm and at Stanford Law School, will provide oversight of the process used to tabulate and report the results, according to the release. Koppes also will serve as the conduit for shareholders wishing to respond to the survey on a confidential basis.
Schering-Plough has participated in the Working Group exploring the issue of “say on pay” and presumably is hoping to head off annual votes, although the company did not indicate how often it intends to conduct its pay survey. A questionnaire should give the compensation committee more nuanced information than an up-or-down vote—and would take proxy advisors out of the equation--but with anger growing daily about extravagant pay practices in the troubled financial sector, Congress may still have advisory pay votes on its to-do list.
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Thursday, August 28, 2008 |
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Another View on Say-on-Pay Progress this Past Proxy Season
Submitted by: Tim Smith, Senior Vice President of Environmental, Social and Governance Issues at Walden Asset Management
The 2008 proxy season demonstrated strong steady support by a remarkable cross section of investors for the reform requesting that an Advisory Vote on Executive Pay be instituted by companies. Even though the number of companies where votes were held grew from 2007, the average vote remained constant around 42%.
In addition ten companies received votes of over 50% and the vast majority of votes were in the 40-49% range. For a second year resolution with a significant number of companies this is an unusually high voting plateau to reach. In addition there is a broad cross section of voting support, some very public and others more circumspect in their support, from T. Rowe price to TIAA-CREF.
With a number of financial companies the votes dropped, e.g. Citigroup, Merrill Lynch, and Morgan Stanley, which is puzzling since major compensation issues exist with those companies. It is hard to know if the reason is a change of the shareholder base because of sales and an influx of new investors. But it does not seem as though institutional investors are stepping back from their support of this reform. They tend to back it on principle, thus the confusion about voting shifts.
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From the point of view of proponents, these votes send a very strong message to company boards and management that this governance issue should be put on their agenda as a top priority for study and action. It is fascinating to see the range of responses, from companies committed to dialogue and careful study of the issue to companies which seem to hunker down and arrogantly ignore the feedback from shareowners. This is most frustrating when a resolution receives a 40 or even a 55% vote and the company refuses to talk.
Other companies are holding back to see what happens in the elections and if “say on pay” will become law. Looking forward, proponents plan to continue to raise this issue through resolutions with approximately 100 companies in 2009.
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Monday, August 25, 2008 |
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Another Majority Vote for “Say on Pay”
Submitted by: Carol Bowie, Governance Institute
Valero Energy recently disclosed results for the Advisory Vote on Compensation proposal that its shareholders voted on this year – the tally shows support of 53.7 percent (based on votes cast for and against), up from 53 percent support for the same proposal in 2007. Both years’ resolutions were submitted by the Unitarian Universalist Association of Congregations (UUA).
Valero thus becomes the tenth company on this year’s list of majority supported “say on pay” shareholder proposals. The list stopped at eight firms in 2007. Under its bylaws, Texas-based Valero counts abstentions when tallying results for shareholder proposals, and by its reckoning the measure did not pass. Valero spokesman William Day told Risk & Governance Weekly that, so far, the company has no plans to address the proposal.
In another distinction, the Valero resolution is the second to get majority backing from votes cast for two years in a row. The other was voted on at Ingersoll Rand. The measure also garnered 50.7 percent support at computer maker Apple this year after obtaining a near-majority (46.6 percent) in 2007.
While support declined somewhat at several financial firms that had the resolution on their ballots over the last two years, overall “say on pay” shareholder proposals have averaged about 42 percent support so far this year over more than 50 meetings where votes have been reported, according to RiskMetrics data – virtually the same level as 2007. Only two votes remain pending for fall meetings, at Procter & Gamble and Oracle. Proponents may currently be more focused on this year’s political election, which may give a boost to their push for advisory pay votes. According to the draft Democratic national platform released on Aug. 7, for example, party leaders “will ensure shareholders have an advisory vote on executive compensation, in order to spur increased transparency and public debate over pay packages.”
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Thursday, May 22, 2008 |
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Explorations in Executive Compensation
Submitted by: Gary Hewitt, Marketing
This week RiskMetrics Group introduced a new research initiative that looks at the always complex issues surrounding executive compensation. The project, Explorations in Executive Compensation is offered in the hopes of sparking constructive dialogue and stirring new ways of thinking about this issue - and in the process help move investors and companies towards a common language for creating, evaluating and communicating about executive pay systems.
The project initially consists two sets of white papers. The first set, Considerations, defines and puts into context the basic elements of U.S. executives' pay packages, with special attention paid to emerging key considerations for investors in evaluating pay and equity plans in particular.
The second set, Innovations, offer a pair of new methods of looking at critical issues in executive pay: peer group benchmarking and and the degree of alignment between the risks borne by investors and by shareholders.
We're excited about this opportunity to advance dialogue and transparency on compensation issues - and are eagerly seeking your feedback on the ideas put forth in the project. Explorations in Executive Compensation is posted online at www.riskmetrics.com/compensation, with an interactive executive summary and online tools to explore the new benchmarking and risk profiling methodologies. Please visit the site and let us know what you think.
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Monday, May 5, 2008 |
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Aflac’s Pay Practices Get 93% Support
Submitted by: Ted Allen, Head of Publications
In the first “say on pay” vote by a U.S. public company, Aflac investors gave 93 percent support to the firm’s executive compensation practices, according to news reports.
There was only 2.5 percent opposition at Aflac’s May 5 annual meeting. The Columbus, Georgia-based insurer decided to hold an annual advisory vote after receiving a shareholder proposal on the issue in late 2006.
Aflac CEO Daniel Amos earned a total of $14.8 million, and had approximately $70 million in stock options vest in 2007, according to the company’s compensation report. Amos’ incentive-based pay is entirely performance-based, the company says, noting that since he took the post of CEO in 1990 the firm’s total shareholder returns have exceeded 3,867 percent. Aflac’s stock price has risen about 126 percent since early 2003.
Six other U.S. companies, including Verizon Communications and bond insurer MBIA, have agreed to hold non-binding pay votes. Meanwhile, investors have filed more than 80 proposals this season asking other firms to take this step. “Say on pay” proposals have averaged 42 percent support at 21 companies so far, earning 50.7 percent support at computer maker Apple, and majority support at printer manufacturer Lexmark International, according to RiskMetrics Group data.
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Friday, May 2, 2008 |
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Analysis: Early Season Trends
Submitted by: Subodh Mishra, Governance Institute
Resolutions calling for advisory votes on pay have received less support at a number of firms this year versus last, according to a RiskMetrics Group analysis of preliminary vote results through April 30.
Governance watchers suggest that a number of factors may underlie the declining support at those firms, though the average support level for all such “say on pay” proposals correlates to that in 2007, based on tallies collected so far.
This year, pay vote proposals have averaged 42.1 percent support at 21 companies so far. That is in line with results for calendar 2007, when 52 such proposals received 42.5 percent average support. Surprisingly, however, the measure received less support at a number of financial companies this season, including Citigroup, Morgan Stanley, Wachovia and Merrill Lynch, where many observers expected the measure would fare better than last year given investor anger over subprime-related losses.
Of the 11 companies where investors voted on the resolution both this year and last, seven have seen declines in support that range from one-tenth of a point at AT&T to 9.6 percentage points at Merrill Lynch. Pay vote proposals received increased support at just five firms, meanwhile, including at Apple (Editor’s Note: this is based on an estimated vote tally of 51 percent, given that the company announced the proposal received majority support, without disclosing the specific votes or percentages; RiskMetrics has recorded a preliminary tally of 51 percent at Lexmark International for the same reason). Defense contractor Lockheed Martin and aerospace giant Boeing each saw 3.9 percentage-point gains.
To view some of the early season trends, please Download file
Continue reading "Analysis: Early Season Trends
Submitted by: Subodh Mishra, Governance Institute" »
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Friday, February 1, 2008 |
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French CEOs Have Highest Pay in Europe, Report Shows
Submitted by: L. Reed Walton, Publications
French CEOs earn the most in Europe, though their pay is still far below the average compensation for U.S. executives, according to the Hay Group, a human resources firm.
French chief executives received the highest median total direct compensation--including salary, bonus, and fair value of long-term incentive awards--according to the survey of compensation at the 50 largest European companies, “How Chief Executives Are Paid,” released by Philadelphia-based Hay Group in January. Numbers were based on the most up-to-date financial reporting figures available from each company, the study noted.
Companies in France also provide the largest long-term incentive opportunities. The most popular long-term incentive plans in Europe were stock options and performance shares, with nine of the surveyed French companies granting the former and two the latter.
The report indicated that companies in the United Kingdom pay their chief executives higher base salaries on average. The total direct pay might have been lower because, all of the U.K. companies surveyed had performance-based share plans. Less than half of those firms have stock option plans, and less than a quarter have matching bonus plans, according to the Hay Group.
Median total cash for European CEOs was about €3.3 million with total direct annual pay (total cash plus the fair value at the award date of any long-term incentive bonuses) averaging about €5 million.
German companies paid the highest bonuses in Europe, with a median payment of 185 percent of salary. U.K. firms were in second with a median bonus payment of 160 percent of salary. By comparison, the median U.S. executive receives bonuses of 300 percent of his or her base pay, the survey noted.
Seventeen European companies reported using deferred bonuses to compensate their CEOs--by which the executives’ bonus payments are held for a period then paid, most commonly in the form of shares. Two companies in the survey--both German--use deferred cash bonus plans, but none of the other European firms do.
The Netherlands had the lowest rates of total CEO compensation. However, the CEO of a Dutch company, Jeroen van der Veer of Royal Dutch Shell, received the fourth-highest total direct compensation of any European chief executive, the report notes. Arun Sarin of U.K.-based Vodafone Group had the highest, followed by executives at GlaxoSmithKline and BP, also based in the U.K.
Dutch investor advocates have warned domestic companies against upward-spiraling CEO pay. In November, the Dutch institutional investor association, Eumedion, sent a letter to the 75 largest companies in the Netherlands urging them to use U.S. companies cautiously in their pay-benchmarking peer groups.
According to the survey, the median total direct CEO compensation at the largest 50 U.S. companies by market capitalization is around €13 million (about $19.4 million). The highest-paid American CEO in the survey (Ed Whitacre Jr. of AT&T) had a total direct compensation in 2006 of about €7.3 million above Sarin, the highest-paid European CEO.
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Wednesday, January 30, 2008 |
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2008 Preview: Pay Proposals
Submitted by: Subodh Mishra, Publications
Investor calls for advisory votes on pay and other measures to reform executive compensation will resonate in 2008 as U.S. capital markets slide in the face of recession.
A network of investors, led by Boston-based Walden Asset Management and the American Federation of State, County and Municipal Employees, has so far filed more than 90 proposals calling for an advisory vote on pay, compared with 44 such resolutions at this time last year.
The network’s membership--which ranges from retail shareholders to pension fund giants including the California Public Employees’ Retirement System--also has grown from 2007. Nearly 75 investors have come together this year to file the measure at primarily large and medium-sized companies.
“Companies receiving the proposal include those where shareholders believe there has been non-performance, options backdating, and other major issues that shareowners need to address,” Timothy Smith, senior vice president at Walden Asset Management, told Risk & Governance Weekly. Abbott Laboratories, Capital One, Lexmark and Wells Fargo are among those targeted.
Spokeswomen at Capital One and Wells Fargo declined to comment on the filings, while officials are Abbott Laboratories and Lexmark did not immediately respond to requests for comment.
The proposal, dubbed “say on pay,” also will be filed at companies such as General Electric that are generally viewed positively by shareholders with respect to executive compensation and other facets of governance, according to Smith. “We believe [such companies] should provide leadership in adopting an advisory vote” on pay, said Smith, who also noted that dialogue on the issue has increased this year.
Governance watchers have in recent months called for increased communication between issuers and shareholders on a range of issues including compensation. “Improved communication and dialogue … may provide compensation committees with a broader perspective and balance in relation to the views provided by management,” wrote Weil, Gotshal & Manges attorneys Ira M. Millstein, Holly J. Gregory, and Rebecca C. Grapsas in a memo to clients earlier this month. “It may also lessen the push for an advisory vote on executive compensation.”
Last year, 20 companies and investors came together to form the “Working Group on the Advisory Vote on Executive Compensation” to study the issue.
Three companies--Par Pharmaceuticals, Verizon Communications, and Aflac—have so far taken steps to allow for advisory votes on pay following shareholder proposal filings in 2007 calling for the right. Aflac, the Georgia-based insurer, will be the first to give shareholders the vote when it holds its annual meeting on May 5. The company originally planned to allow for the vote in 2009.
Concerns over compensation in 2008 will not be limited to calls for advisory votes on pay, though. Novel proposals will include demands for companies to adopt a policy on the use of so-called 10b5-1 stock-selling plans, and those seeking to limit or bar tax gross-ups for senior executives. Another resolution seeks to place limits on executive employment agreements.
First year proposals generally do not fare as well as those in their second and third year, though this year may prove an exception.
“As the market declines, there’ll be more support for compensation reform,” notes Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance. “The downturn will only fuel the efforts of shareholders.”
Reports of record Wall Street bonuses at financial firms that sustained considerable losses in 2007 as a result of exposures to mortgage-related investments are likely to stimulate broad support for proposals tied to executive pay. Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns together awarded roughly $39 billion in year-end bonuses, exceeding the $36 billion distributed in 2006 when the industry reported all-time high profits, Bloomberg News reported.
CEOs at Morgan Stanley and Bear Stearns forfeited bonuses in light of bad bets on subprime mortgage-backed securities. That may mollify shareholders who are expected to vote on a range of proposals including those calling for strengthened links between pay and performance. Labor funds, led by the United Brotherhood of Carpenters’ and Joiners of America, have so far filed more than 50 such resolutions at spring annual meetings.
Continue reading "2008 Preview: Pay Proposals
Submitted by: Subodh Mishra, Publications" »
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Friday, December 7, 2007 |
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Pay Consultant Concerns Debated
Submitted by: L. Reed Walton, Publications
U.S. lawmakers this week heard testimony from investor representatives who called for more disclosure from companies about other work done by consulting firms that advise boards on executive pay.
The hearing of the House Committee on Oversight and Government Reform was called by panel Chairman Henry Waxman, a Democrat from California, to determine whether compensation consultants are likely to recommend excessive executive pay in exchange for lucrative contracts on other services for companies. The Dec. 5 hearing coincided with the release of a report by Democratic lawmakers drawing a link between egregious pay practices and the competition by pay consultants for other contracts.
Labor and state pension funds previously have expressed concern that work done by compensation consulting firms outside of advising boards on executive pay may compromise a consultant's independence. The AFL-CIO and other labor funds filed nine proposals on this topic this year--three of which went to a vote--and plan to file similar resolutions for 2008.
In testimony to lawmakers, shareholder advocates blamed rising executive pay on the Securities and Exchange Commission's failure to require U.S. companies to tell their investors what services outside of pay advice these consulting firms provide. The SEC's 2006 compensation disclosure rules do not require issuers to list the outside services provided by pay consulting firms or how much money was paid for these services.
"The SEC betrayed investors by not going far enough in their disclosure rules," said Daniel Pedrotty, director of the AFL-CIO's office of investment. "The board is relying on advice that could be conflicted," he added, "and shareholders should know about that."
Meredith Miller, assistant treasurer for policy in the Connecticut State Treasurer's Office, which oversees the state's pension funds, said corporate disclosure on pay consultants has been "woefully inadequate."
Competing for contracts that can pay much more than compensation consulting alone, Miller said, puts consultants "on the exact same path" toward being totally beholden to top management as auditors were before the accounting scandals at Enron and WorldCom.
"One of the lessons of Enron is that when an auditor has a business relationship with companies, their independence is questionable," said Rep. Elijah Cummings, a Democrat from Maryland.
Republican lawmakers criticized the comparison between audit firms that fraudulently signed off on company accounts and compensation consultants who do other projects for the company, and questioned the need for disclosure to shareholders.
"Shareholders rely on audit reports, but not on compensation consultant reports. Only directors rely on that," said Rep. Tom Davis of Virginia, ranking minority member of the committee.
Houman Shadab, a research fellow at George Mason University and a witness at the hearing, agreed. "Having companies disclose information that is not material to deciding whether to purchase securities … would flood the market with confusing information," Shadab said.
During the hearing, many Republicans questioned the need for additional disclosure when the compensation committee is already required in many instances to be free of ties to executives. Since 2003, the New York Stock Exchange has required companies to have a pay committee that is composed entirely of independent directors.
In 2004, the National Association of Corporate Directors released a report stating that firms providing pay advice to board compensation committees "should not be retained by the company in any other capacity."
Rep. Virginia Foxx, a Republican from North Carolina, said that if shareholders were truly upset about compensation consultant disclosure, they would have contacted lawmakers prior to the hearing. Democratic Rep. Peter Welch of Vermont acknowledged that he had not heard from shareholders about the issue, either.
However, Miller and Pedrotty said they have approached the SEC and individual companies. The Connecticut State Treasurer and the AFL-CIO joined 11 other institutional investors in October 2006 in writing letters to the 25 largest U.S. companies, urging them to exceed the SEC's reporting requirements on compensation consultant independence.
Miller said that 11 companies out of the 25 that received letters now have an outright ban on compensation consultants doing other services for the same company. In December 2006, General Electric agreed to provide additional disclosure in response to a proposal by the AFL-CIO.
Continue reading "Pay Consultant Concerns Debated
Submitted by: L. Reed Walton, Publications" »
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Friday, November 2, 2007 |
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Verizon Adopts "Say on Pay"
Submitted by: L. Reed Walton, Publications
In response to shareholder pressure, Verizon Communications has agreed to hold an annual advisory vote on executive compensation in 2009.
The decision by Verizon’s board comes after shareholders of the New York-based telecommunications and Internet service company gave 50.2 percent support to a resolution asking for a non-binding vote on executive pay policies at the firm’s annual meeting in May.
Verizon is the second U.S. public company to adopt an annual pay vote, known as “say on pay,” a right given to investors by law in markets such as the United Kingdom and Australia.
Insurance company Aflac received a similar resolution, but decided to adopt “say on pay” in February before the matter went to a shareholder vote. Aflac, like Verizon, will hold the first advisory vote on executive pay policies at its 2009 annual meeting.
According to a Nov. 1 press release, Verizon’s presiding director, Sandra O. Moose, said that the board’s decision will “further strengthen Verizon’s corporate governance practices.”
A number of Verizon shareholders, including the American Federation of State, County, and Municipal Employees (AFSCME), Walden Asset Management, and the North Carolina and Connecticut state pension fund officials, co-signed an Oct. 17 letter that urged the directors to consider adopting an advisory vote policy.
“Giving shareholders an opportunity to vote on executive pay is a simple and easy way to improve Verizon’s corporate governance policies,” the investors’ letter read. “Since the vote is not binding, it will give us a voice in the process without allowing us to micromanage the [c]ompany.”
The Amalgamated Bank, which invests for labor interests through its LongView funds, sent a letter on Oct. 31 that called for an annual advisory vote. The letter criticized past pay practices at Verizon, where five directors received between 7 and 11 percent opposition in May amid an AFL-CIO “vote no” campaign over CEO Ivan Seidenberg’s compensation.
The company initially objected to the “say on pay” proposal, filed by C. William Jones, president of the Association of BellTel Retirees. Verizon argued in its proxy statement that an up-or-down vote on pay would be a blunter instrument than simply communicating grievances over pay directly to the board.
After the proposal received majority support, however, the board began a dialogue with shareholders--including Jones--according to the company’s Nov. 1 press release. Aflac went through a similar process of consulting with large investors before deciding to adopt “say on pay.”
“We believe that it is important to engage in an ongoing dialogue with shareholders and others,” Verizon presiding director Moose said in the press release.
Richard Ferlauto, AFSCME’s director of pension and benefit policy, lauds the Verizon decision as “a breakthrough.” “It’s the first time a company has moved to adopt ‘say on pay’” after a vote on a shareholder proposal, Ferlauto told Risk & Governance Weekly.
The AFL-CIO (of which AFSCME is a part) is also optimistic about the possibility for an advisory vote, but the labor federation expressed some concern about the language used by the Verizon board to describe its new pay vote policy.
The company describes the new policy as providing a shareholder advisory vote “related to executive compensation,” leaving some AFL-CIO officials nervous about whether all of the company’s pay practices will really be put to a vote and whether pay disclosure will be made in a clear and meaningful way, said Heather Slavkin, the AFL-CIO’s senior legal and policy advisor.
“As we all know, the devil is in the details,” Slavkin told Risk & Governance Weekly. “We are eager to see how it actually looks when the management proposal is submitted to shareholders.”
The Verizon board also modified its policies on compensation consultant independence and executive severance pay--both in response to high support for shareholder proposals on these issues at the annual meeting.
A new policy ensures that any firm consulting on executive pay for the board is not allowed to do any other contractual work for the company. A Communication Workers of America proposal asking the company to examine the independence of its compensation consultant won 46.9 percent support in May.
According to the press release, Verizon has also implemented a revised policy that more specifically defines the types of payments that can be used in calculating a severance payment to an executive, but regulatory filings including the exact details of the new policy have not yet been released. A shareholder proposal, which asked for severance payments to be limited to 2.99 times (or less) an executive's annual pay plus bonus, received 47 percent support at the meeting.
At least one other company where a “say on pay” resolution received majority support is considering adopting a yearly advisory vote, Ferlauto reported. AFSCME, Walden, and Connecticut and North Carolina fund officials sent a similar letter urging the board at industrial equipment manufacturer Ingersoll-Rand to hold an annual pay vote. A Unitarian Universalist Association proposal on “say on pay” received 56.7 percent support at the company’s meeting in June.
According to Ferlauto, Ingersoll-Rand’s board responded by indicating that it has begun to contact major shareholders to get their views on implementing an advisory vote on pay.
And more companies may face shareholder pressure to follow suit. “Say on pay” proposals received majority support at six other firms this year in addition to Verizon and Ingersoll Rand. The latest was a resolution at Par Pharmaceutical that received 56.8 percent support on Oct. 16, according to the proponents, the New York City Public Employees' Retirement System.
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Tuesday, October 30, 2007 |
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Trends in Executive Compensation Leadership Interview
Submitted by: Sarah Cohn, Marketing and Communications
Do you want to hear about the latest developments on say on pay or compensation disclosure best practices? RiskMetrics Group has just posted an interview on trends in executive compensation with Carol Bowie of RiskMetrics Group’s Governance Institute and Stephen Deane of RiskMetrics Group’s Governance Exchange Team. The discussion covers where the say on pay issue is headed, how performance-based stock options did during the 2007 proxy season and emerging compensation trends. Stephen Deane specifically discusses best practices in compensation disclosure based on his new report, Compensation Disclosure: Best Practices and Examples.
To listen to the interview, please visit RiskMetrics Group’s 2007 Fall Leadership Interview Series web page.
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Monday, October 1, 2007 |
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Activision: A Record Vote for "Say on Pay"
Submitted by: L. Reed Walton, Publications
Investors at Activision gave 69 percent support to a shareholder resolution asking for an annual advisory vote on executive compensation (“say on pay”), according to proponents.
Conrad MacKerron, director of the corporate social responsibility program at the As You Sow Foundation, reported the result--the highest ever for a “say on pay” proposal in the United States--after the company’s annual meeting on Sept. 27.
Activision, a Santa Monica, California-based video-game maker, is now under formal investigation by the Securities and Exchange Commission in connection with the company’s past stock-option granting practices.
In May, a special subcommittee of Activision’s board found that about 63 percent of option grants made to former and current employees from 1997 to 2003 had been misdated. In many cases, grant dates reflecting the lowest or second-lowest exercise price for the month or year had been selected with the benefit of hindsight.
Even before the subcommittee presented its findings, the company replaced the director of human resources, dismissed its former outside counsel, and created a new “principal compliance officer” post. The officers and directors who had received misdated options that had already vested agreed to make up the difference in exercise price, per the subcommittee’s recommendation.
The Activision result marks the seventh time this year that advisory pay vote measures have attained majority support. The proposal--now in its second year--has averaged 42.4 percent support over 42 meetings since January.
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Friday, June 15, 2007 |
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A Closer Look at "Perks"
Submitted by: L. Reed Walton, Staff Writer
This year, as U.S. companies file proxy statements under the new compensation disclosure rules, the perquisites and other extra benefits that top executives enjoy are becoming more apparent to investors.
Before this proxy season, many executive perks were largely obscured, with a few coming to light years later during litigation or government probes. Prominent examples include the $15,000 umbrella stand and other luxury items purchased by Tyco International CEO L. Dennis Kozlowski, the personal aircraft use by former Tyson Foods Chairman Donald J. Tyson and his family, and the retirement perks received by General Electric CEO Jack Welch, which included use of an $11 million Manhattan apartment and a Mercedes. These headline-grabbing benefits helped spur investor demands for better disclosure of perks and other forms of executive compensation.
The new Securities and Exchange Commission rules mandate that companies disclose perks in aggregate of $10,000 (down from the former limit of $50,000) in the summary compensation table. The rules are causing some firms to cut back on perks, while other companies seek to defend these extra benefits by citing retention and security concerns.
Some investor advocates are not persuaded by corporate arguments that perks are still needed to retain top executives.
"Pay should be tied to long-term sustainable corporate performance, so perks can break this pay-for-performance link," Justin Levis, a senior analyst with the Council of Institutional Investors (CII), told Governance Weekly.
Levis said he "has yet to hear a convincing rationale" from companies about why they provide free personal travel on the corporate plane, club dues, home security, and other "extras."
Perks reform, said Michael Garland, director of value strategies for the CtW Investment Group, the investment arm of labor federation Change to Win, is "obviously a reform that the labor funds are highly supportive of."
"In situations where there are egregious perks," Garland told Governance Weekly, "you will see shareholders develop either ... proposals or [requests for] greater accountability of board members."
As companies file their first proxy statements under the new disclosure rules, it's not yet clear whether a significant number of firms are scaling back the perks, supplemental retirement plans, and other benefits that are not provided to regular employees. However, anecdotal evidence suggests that many firms still offer these benefits, and they now are making a greater effort to explain these practices to shareholders.
For instance, Boeing's proxy statement provides a breakdown of CEO James McNerney Jr.'s personal use of the corporate jet, which the company valued at $331,649. That total includes $63,053 for personal travel associated with relocation, $268,396 for general personal travel, and $9,160 for travel to outside board meetings. McNerney serves on two boards aside from Boeing's.
Drugmaker Eli Lilly's proxy specifies that CEO Sidney Taurel only used the company jet for personal travel to and from outside board meetings. "The company does not provide significant perquisites or personal benefits to executive officers, except that the company aircraft is made available for the personal use of Mr. Taurel and [Chief Operating Officer John] Lechleiter, where the committee believes the security and efficiency benefits to the company clearly outweigh the expense," the proxy statement reads.
While Goodyear Tire & Rubber offers top executives home security services, financial planning, tax preparation, country club dues, and annual physical exams, the company's proxy statement said the compensation committee "does not consider these perquisites to be a significant component of executive compensation."
Retention and security are the most-often cited reasons for executive officer perquisites. Morgan Stanley and eBay say in their proxy statements that perquisites (and other benefits such as bonuses and equity awards) are essential to retaining the same quality of executives that lead other firms in their revenue and industry grouping. The companies provide bulleted lists of peer companies with which they must "compete" for top executive talent.
Margaret Whitman, CEO of online auction firm eBay, received more than $1 million in personal travel on the company plane, including nearly $240,000 in reimbursements for taxes (also known as "gross-ups") owed on that travel. The company also notes that it paid finance chief Robert Swan close to $1 million in relocation fees and related tax gross-ups for "costs and expenses related to moving from Texas to the San Francisco Bay Area and the sale of his home." EBay also offers information technology support for executives' home computer systems.
Southern Union's proxy statement notes that it has a "policy that encourages [CEO George] Lindemann and his spouse to