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."

In many cases, they get to okay annual bonuses as well because of IRS rule 162M, which requires that in order for a company to claim a tax deduction on an executive’s compensation above $1 million, any incentive plans that could push the total past that amount must be approved by shareholders.

Of course, shareholders can also withhold votes for directors on a company’s compensation committee if they don’t like the pay packages executives are granted.

What, then, is all the fuss about?

It’s All About Accountability

Shareholder groups see Say on Pay as a key cog in mandating greater accountability for corporate executives.

“Our view is that compensation is significantly broken now because of a perverse set of incentives that are in play, and Say on Pay could help correct some of that,” said AFSCME’s Ferlauto. “For example, it could result in pay being distributed more equitably among executive officers. And it could result in pay being used as a way to develop internal talent and reward long-term performance, which is always more effective than going outside the company and bringing in the latest rock star.”

Ferlauto called Say on Pay “an important mechanism that provides a check against compensation committees who are too willing to give the benefit of the doubt to CEOs who are not performing and expecting large paychecks.”

But aren’t all the existing shareholder rights vis-a-vis executive compensation sufficient? Not at all, according to Paul Hodgson, senior research associate with The Corporate Library, a for-profit governance research firm whose clients include both investment firms and corporations.

“Being able to vote on incentive and stock-compensation plans, and also being able to give an up-or-down vote on compensation-committee members, is all very well,” said Hodgson. “But voting on the actual pay — the outputs of those incentive plans — is significant.”

Equity plans typically give companies tremendous leeway to put almost any kind of compensation into practice, according to Hodgson. A plan might stipulate generally that the company can award stock options, restricted stock, restricted stock units, performance shares, long-term cash bonuses, or some combination thereof. It might include parameters that will never be reached, such as “no individual may receive any more than 5 million shares in a year.”

Voting on these plans is “like voting on the outline of a story before it’s written,” said Hodgson. “Most incentive plans are very similar to each other, but their eventual outcomes — the stock-option grants and long-term incentive grants — are very different, in terms of both the performance measures used and the amounts.”

With Say on Pay, shareholders vote on compensation as described in the Compensation Disclosure & Analysis section of the proxy statement. For companies that adhere to the Securities and Exchange Commission’s new rules requiring expanded disclosure, as more and more are doing, the CD&A should provide a good idea of what amounts have been paid out, which awards have just vested, and what is likely to be paid out at various future points. Voting on this is “voting on the story itself,” said Hodgson.

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