Risk & Compliance

Institutional Investors Eye “Say on Pay”

Annual advisory vote would ''give shareowners a way to express their frustration with how boards are dealing with the compensation issue.''
Stephen TaubJanuary 29, 2007

A group of institutional investors have filed a resolution with 44 U.S. corporations to win the right for shareholders to submit an advisory vote on executive compensation packages.

The resolution, informally dubbed “Say on Pay,” is literally that, since it would not be binding on the companies.

“We are focusing on companies where exorbitant pay has been lavished on CEOs despite a failure to deliver results commensurate with their compensation,” said AFSCME President Gerald W. McEntee, in a statement. “Far too often, the pay of CEOs is guaranteed regardless of whether the company sinks or swims under their leadership. It is time to give shareowners a way to express their frustration with how boards are dealing with the compensation issue.”

The investor network, organized by the employees pension plan of the American Federation of State, County and Municipal Employees (AFSCME) and Walden Asset Management, also comprises the New York City Employees’ Retirement System, the AFL-CIO, the Connecticut Retirement Plans and Trust Funds, Hermes Investment Management (U.K.), the Needmor Fund, Amalgamated Bank, Boston Common Asset Management, the Marianists, Bon Secours Health System, the Unitarian Universalist Association, and the Benedictine Sisters of Texas.

The institutional investors asserted that the resolution was submitted at companies where they deem pay to be excessive or where they feel there has been a misalignment between pay and performance over the past three to five years. Among the companies are Affiliated Computer Services, Citigroup, Coca-Cola, Exxon Mobil, Home Depot, Jones Apparel, Merck, Nabors, Pfizer, Qwest, Time Warner, United Health, and Wal-Mart.

Last proxy season, when a similar measure was proposed for the first time, it received 44 percent support at Sun Microsystems and Countrywide Financial, 43 percent support at Sara Lee, 41 percent at US Bancorp, and 40 percent at Home Depot, according to AFSCME.

Proponents of the measure assert that a law passed in the United Kingdom in 2002, requiring publicly traded companies to give shareholders an up-or-down advisory vote on executive pay, has successfully restrained the growth rate of CEO compensation. The U.K. law “has stimulated meaningful discussions between companies and shareowners on the philosophy and metrics related to what goes into top management pay packages,” said Bess Joffe, manager at Hermes Equity Ownership Services, a U.K.-based investment firm and a sponsor of the United Health resolution, in a statement.

“Say on Pay” is one of many compensation-related measures that have been submitted for this year’s proxy season. Others call for linking pay to certain performance measures, requiring executives to hold the underlying stock of exercised options for at least two years, and demanding that they return bonuses after a restatement.