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."

Where the Heart Is

Another central argument by consultants is that a shareholder vote on pay is likely to be based on emotions rather than facts.

“If Google decided to pay its founders a quarter-billion dollars apiece, I don’t think anyone would care,” said Jack Dolmat-Connell, president of consulting firm DolmatConnell & Partners, “because everyone loves Google. Everyone loves Apple because of iPods. Everyone loves Aflac because of the duck. If an oil company had Say on Pay, the compensation package probably would get voted down, because people hate oil companies right now.”

Many shareholders, particularly smaller ones, can be expected to read only part or even none of the CD&A in the proxy, he added. “They won’t be making a rational, informed vote,” he said. “They won’t have enough information.”

Johnson agreed. “Compensation issues are difficult enough to handle for a compensation committee that works on them all the time,” he said. “To ask shareholders for their views is going to be a burdensome side show.”

To that Choi of TIAA-CREF responded, “I can’t believe they’re saying that.” Most shares are held not by retail investors anymore but very sophisticated institutions, pension funds, and mutual funds, she noted. “If we’re able to make decisions whether to invest, we can evaluate compensation programs to determine whether they’re in our long-term interests.”

Emotions may come into play also because shareholder voting on executive pay has become a populist issue, noted Mark Poerio, global executive compensation and benefits practice leader at the law firm Paul, Hastings, Janofsky and Walker. That could boost the chances for the pending legislation to pass, he noted disapprovingly.

“In theory, next year there will be another hot issue and Congress will pass another law that says shareholders have to approve overseas investments, or outsourcing, or some other hot issue of the day,” Poerio said.

Hodgson, though, said the legislation is unlikely to go anywhere. “There will be an awful lot of lobbying going on, so I’m not sure how much success there will be getting it through the Senate.”

Give ‘Em the Boot?

The question remains, though: What’s wrong with holding the compensation committee responsible for excessive compensation by withholding votes for their continued presence on the board?

“Say on Pay doesn’t solve the significant compensation problem in this country, which is the directors who approve problematic pay packages,” Elson said. “The fact of whether or not you supported the package doesn’t cure the poor oversight. If you don’t like what directors have done, replace them.”

Others see that as an unacceptably aggressive. Choi called it “the nuclear option, if you will.” AFSCME’s Ferlauto said booting board members “is a sledgehammer, where a scalpel might be more appropriate, at least initially.”

If there’s a well-functioning board that’s good at strategic planning and has the right mix of talent and experience and there are objections to the way pay is used, “do you really want to vote those people out?” Ferlauto said. “What you want to do is send a message to the compensation committee that you’re voting against the problem itself, which is the pay.”

Crystal Ball

Assuming the legislation doesn’t pass, what is the likely course for the Say on Pay movement?

“I think it’s a blip,” said Dolmat-Connell. “Certainly you’re not going to see the vast majority of public companies doing it.” He acknowledged, though, that as many as a few hundred, mostly large companies might end up with shareholder advisory votes.

Countered Ferlauto, “The ball is rolling. We’re getting stronger support this year. I think companies are going to feel pressure that if they don’t move voluntarily toward adoption, there is legislation that may be less flexible for them.”

Johnson couldn’t help but agree, despite his antipathy for Say on Pay. “After Sarbanes-Oxley, it’s one more nail in the coffin for being a public company in the U.S.,” he said, “but I think it will come — slowly, but it will come, because it’s politically correct.”


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