CEO compensation: The $10 million-plus club - 20 May 2010, Chicago Tribune

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Say-on-pay votes, while nonbinding, are gaining traction with
shareholders

By Julie Wernau, Tribune reporter

May 23, 2010

At Motorola Inc.'s May 3 annual meeting, shareholders sent
the board a blunt message: No rich pay package for top executives.



It represented the first time shareholders joined forces to vote as a
majority block against executive compensation. Three days later,
Occidental Petroleum Corp. shareholders also rejected an executive pay
package.



While such "say-on-pay" votes are nonbinding, they put pressure on those
companies' boards to do a better job of explaining executive
compensation. Executive pay at public companies continues to be under
the microscope, and market experts say the back-to-back "no" votes
marked a turning point for a shareholder movement that began in 2006.



"Up until Motorola and Occidental, it was only theoretical," said Mike
Melbinger, lead partner and global head of Winston & Strawn's
employee benefits and executive compensation practice group in Chicago.



This proxy and annual meeting season is largely over. But the say-on-pay
movement is gaining traction, and some companies are reducing CEO pay,
partly as a result of the recession, government intervention as a result
of bailouts and because of increasing shareholder activism.



Meanwhile, pending legislation is poised to launch a form of say-on-pay
into law.



"There's a renaissance taking place," said Larry Eiben, chief operating
officer of TFS Capital, an advisory firm that provides
portfolio-management services to investment funds. "People have just hit
the wall. The negative press that has come out of the latest market
downturn and just the general excesses you've see in corporate America …
the shareholders understand the need now to get more involved."



According to proxy advisory firm RiskMetrics Group, 52 companies out of
the 7,000 it follows saw resolutions on proxy ballots this year calling
for shareholders to hold an annual say-on-pay vote — a "yes" or "no" in
support of executive compensation.



Another 70 companies agreed to adopt resolutions, joining the 280 firms
that hold such votes, either voluntarily or because it is required for
firms that received government bailouts under the Troubled Asset Relief
Program.



Significantly, the proponents behind such measures have been larger
shareholders, whose power comes from their considerable stakes in
companies. Such shareholders include employee pension funds and
institutional investors. Companies can ignore the votes, but governance
and compensation experts say the measures have teeth because the next
step would be for shareholders to withhold votes to approve management's
slate of directors.



Meanwhile, a Securities and Exchange Commission proposal would make it
cheap and easy for larger, longer-term shareholders to write in their
own director candidates.



"They can argue, 'Look, if we don't like the board, we can just elect
another one,'" said B. Espen Eckbo, founding director of the Center for
Corporate Governance at the Tuck School of Business at Dartmouth
College.



The looming possibility of shareholder-led proxy fights has companies
scrambling to maintain shareholder confidence in management-compensation
practices. In fact, some companies are recalibrating pay packages.



Nationally, CEOs saw their median total compensation (the point at which
half the CEOs made more and half made less) decline last year for the
second year in a row, according to a survey of 679 CEOs conducted by The
Corporate Library, a Maine-based governance research firm.



In Illinois, where CEOs saw a median increase of 9 percent, 10 companies
either held say-on-pay votes this year or faced shareholder proposals
to adopt annual say-on-pay votes. Such proposals were brought this year
at Boeing Co., McDonald's Corp., Deere & Co. and Allstate Corp. The
boards at those companies urged shareholders to vote down the
proposals, arguing that an annual "yes" or "no" vote on compensation
would provide little or no information to the board.



Allstate said an open dialogue would be more instructive. Nevertheless,
Allstate's shareholders passed a resolution Tuesday that would give
shareholders a say on pay, a proposal that had been rejected twice.



The resolution, brought by AFSCME Employees Pension Plan, which holds
37,200 shares of common stock, expressed concerns that Chairman and CEO
Thomas Wilson received compensation that was $6 million above the pay of
the next-highest executive at the company, a pay-equity gap AFSCME, a
union, says correlates with poorer company performance.



"In the U.K., listed companies give shareholders a say on pay. We just
think it's a shareholder's right to have a say on pay, particularly in
the financial services sector that almost brought down our economy,"
said Lisa Lindsley, director of capital strategies for AFSCME, which is
behind several say-on-pay resolutions.



At Deere, which recently named a new CEO, the Council of Institutional
Investors and the California Public Employees' Retirement System brought
forward say-on-pay proposals over perks they said surfaced under the
previous administration.



The groups said personal use of company aircraft by the former CEO was
4.5 times that of other CEOs in the same market, and they were concerned
about a business trip to India in 2007 that Deere paid for, which
included directors' spouses. A Deere spokesman said the company had no
further comment about the proposal.



At Motorola, the "no" vote was a slap to the pay package given co-Chief
Executive Sanjay Jha, whose total compensation was $3.77 million in
2009. He stands to receive a 3 percent stake in a new set-top-box
business if the company splits into two, or $38 million if the deal
falls apart.



At the annual meeting, Jha said the board felt his compensation was
appropriate for "a business to be turned around from where (mobile
devices) was."



Paul Hodgson, senior research associate with The Corporate Library, said
Motorola should have communicated more with shareholders and made the
appropriate changes to its compensation practices after shareholders
nearly reached the majority threshold in a 2009 say-on-pay vote.



"Companies say that say-on-pay is a blunt instrument, that no one knows
what anyone is voting against. Let's just ask, shall we? How difficult
is it? They know who their shareholders are," Hodgson said.



Proxy advisory firm RiskMetrics has played a big role in fanning support
for the say-on-pay push. The firm, which advises 1,300 proxy advisory
clients who together vote trillions of shares, is urging shareholders
who don't see results following a "no" vote on compensation to withhold
votes from the company's slate of directors at the next annual meeting.



"This issue has gained increasing amounts of traction. It's part of
legislation that's being considered in Congress now, and a number of
companies have either seen this pass or come close to passing," said
David Drake, president of Georgeson, a major proxy solicitation firm in
New York.



Drake said his firm, which works with companies to encourage
shareholders to vote in support of a board's recommendations, tells
companies that they need to have frequent communication with its top 50
institutional investors, particularly since most voting is confidential
and a "yes" or "no" vote on executive compensation doesn't provide
context on its own.



"The only way that you can really fully understand what your issues are
is to communicate with your investors," Drake said.



Elizabeth Saunders, managing director and head of the capital markets
communications practice at FD, a business and financial communications
consultancy, said that while compensation wasn't a part of a company's
communications strategy 10 years ago, new compensation disclosures have
changed the landscape. Most companies start talking strategy in
February, she said.



"Nobody thinks it will go back to the way it was. Everybody knows we
have to have a defensible, comprehensive standing on the topic,"
Saunders said.



Tribune reporter Wailin Wong contributed to this report.