Update on Big Shareholders vs. CEO Pay

A good piece in today’s Wall Street Journal, “Shareholders Push for Vote on Executive Pay,”recounts the efforts of major institutional investors to exert pressure against excessive CEO pay via non-binding shareholder resolutions.

UK funds have been in the forefront of this effort, because similar regulations are already in force there. Although the UK rules have not had as much of an effect as hoped, the major shareholders feel it has had some impact, and has also increased the amount of direct discussion between the funds and their investee companies.

From the Journal:

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 Citigroup Inc., Wells Fargo & Co., WellPoint Inc. and Northrop Grumman Corp.

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….

One company facing a shareholder proposal, insurer Aflac Inc., agreed earlier this month to give investors a nonbinding vote on executive compensation, beginning in 2009. Others, including Pfizer Inc. and Schering-Plough 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 votes.

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 somewhat.

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 GlaxoSmithKline 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 before.

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.

Tlk doesn’t always translate into action. Early last year, London-based investment manager Amvescap 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 the bonus.

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….