Say What? The Battle over Executive Comp

Big investors and compensation consultants, both with much to gain and lose, dig in and defend their ground over "Say on Pay."

For a measure that fewer than 10 of the 17,000 or so U.S. public companies have adopted, “Say on Pay” certainly has heated up a cauldron of strong feelings among many who have high stakes in executive-compensation matters.

Aside from the executives themselves, who presumably prefer their pay higher than lower and with lucrative incentives, such interested parties prominently include large institutional shareholders and their supporters, who have driven the movement to give investors an advisory vote on executive compensation; and compensation consultants—virtually all of whom characterize Say on Pay as stupid and a sham.

In May, Aflac became the first publicly held American company to hold a shareholder advisory vote on pay. The insurance firm’s proposed senior-executive compensation package was approved by a 93 percent landslide.

Aflac was among dozens of companies at which shareholders filed Say-on-Pay proposals during the 2007 proxy season, and about 100 were filed this year. But few have received the majority approval that’s required before a board of directors will even consider adopting the measure.

This year, on average, only about 43 percent of shareholders have voted to give themselves a greater voice on executive compensation, according to Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees (AFSCME), a leading proponent of Say on Pay. That percentage is up slightly from last year, he noted.

Aside from Aflac, companies that have agreed to adopt Say on Pay include Verizon, Blockbuster, Apple, and Lexmark, all of which are expected to have their initial votes in 2009. Shareholders at a handful of other companies, including Motorola, have approved the measure but so far have failed to persuade those firms’ boards to alter their policies.

It’s possible that at some point there won’t be a choice. Legislation that would require public companies to let investors weigh in on executive compensation, proposed by Rep. Barney Frank (D-Mass.), was passed by the House of Representatives last year. It is currently awaiting action by the Senate, where it is sponsored by presidential candidate Barack Obama. John McCain and Hillary Clinton also support the concept.

Say What?

A curious aspect of the tussle over Say on Pay is that it arguably does not give shareholders all that much say. The proposals that have been approved call for non-binding, advisory votes. And investors don’t opine on the compensation for individual executives, but merely the aggregate for the five named in a company’s proxy statement.

What’s more, even without Say on Pay, shareholders wield significant authority. They get to approve all equity-based compensation plans in a binding vote that is required for a company to be listed on the New York Stock Exchange. And, “it’s the equity plans that really create the big numbers that are the source of the pay objections,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.


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