Shareholders get voice on executive pay

For first time, 'say on pay' proposals considered at most publicly traded U.S. companies

April 17, 2011|By Hanah Cho, The Baltimore Sun

Brian Jones, a longtime shareholder of McCormick & Co., wasn't very happy about the multimillion-dollar pay pocketed last year by executives at the Sparks-based spice maker. So he let them know on the company's proxy statement.

He's part of a new wave of shareholders, fueled by anger over CEO riches, government bailouts and the financial crisis, who can now weigh in on executive pay.

"In my opinion, the top executives make too much," Jones, 65, said of corporate America's compensation practices as he waited for McCormick's annual shareholder meeting in Cockeysville to begin last month.

He and like-minded stock owners didn't prevail. McCormick shareholders overwhelmingly approved the company's executive compensation. But not every company's management is getting off so lightly.

Starting this year, thanks to the Dodd-Frank financial reform act, shareholders in Maryland and across the country are getting an official say on what executives are paid at most U.S. publicly traded companies.

Executive compensation is climbing back up even as unemployment remains high at 8.8 percent. Early data indicate that CEOs at large corporations received double-digit percentage pay increases last year.

These "say on pay" votes — yes or no — are advisory in nature, but shareholders can send a strong signal to top management and board members. While corporate boards are not bound by the votes, the ballots are designed to give shareholders a greater voice.

Separately, shareholders also now have a nonbinding say on how often they want to vote on pay: every year, two years or three years.

Corporate governance experts caution that companies ignoring compensation concerns run the risk of alienating investors and creating more strife.

"I think there's certainly strong incentive for companies to be responsive to any dissatisfaction that is expressed through the votes," said Carol Bowie, head of compensation policy development at Institutional Shareholder Services, a proxy advisory firm. "If they're not, at some point, that opposition would spill into the director election or compensation [committee] member election."

So far, most companies are winning support for their executive pay practices, with shareholders giving on average about 90 percent approval, according to data compiled by Institutional Shareholder Services.

But shareholders are wielding their new power by rejecting executive pay at some large companies, including Hewlett-Packard, homebuilder Beazer Homes and Jacobs Engineering Group. Hewlett-Packard and Beazer, for instance, said they would carefully consider the results.

Along with influential proxy advisory firms, several large institutional investors, such as the California Public Employees' Retirement System, have called on companies to support annual votes on pay, which they argue provide better accountability and transparency.

In the past, shareholder activists were able to pressure some companies into including say-on-pay votes on proxy ballots. But it wasn't until after the financial disasters of 2008 that Congress made them required under law. The recession reignited calls to put a stronger check on corporate largesse, especially in light of government bailouts of Wall Street firms, banks and other industries.

"This is a byproduct of the financial crisis," Brian Rogers, chairman of Baltimore's T. Rowe Price Group and a veteran mutual fund manager, said of the say-on-pay movement. "People don't object to executives making a lot of money if the company does well, but the problem is the disconnect that irritates investors, appropriately so."

Some executive compensation experts are not optimistic about whether say-on-pay votes will have any teeth.

"Ultimately, if you're upset with the pay, you're really upset with the people who negotiated the pay," said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, referring to board members on compensation committees. "Your response should be to replace them. Your beef is with compensation board members."

"I think a lot of this is much ado about not much," he said of say-on-pay votes.

Local businesses

Among companies in the Baltimore region, Price, apparel maker Under Armour and Constellation Energy Group have recommended votes on executive compensation every year, while McCormick shareholders supported the company's push for a triennial vote. Asset manager Legg Mason Inc., whose fiscal year ended March 31, has yet to file its proxy, which includes details on executive compensation.

At its annual meeting last week at its Owings Mills campus, a majority of Price shareholders voted in favor of the firm's executive pay packages. And shareholders also overwhelmingly supported the board's recommendation to vote on pay annually.

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