Pay Wars, Continued -- Proxy Season 2011 Halftime Report

Last Updated Apr 22, 2011 10:45 AM EDT

We're getting close to halfway through proxy season, so let's look at what we've got so far. GovernanceMetrics International has issued a preliminary report on pay trends in 2011. Not much has changed, but there are a few encouraging signs.

First, the bad news. At least three shareholder-unfriendly pay provisions remain persistently widespread.

  • Almost every S&P 500 company pays long-term incentives either without controlling for peer performance or while actually underperforming peers.
  • Almost 90 percent let fired CEOs keep unvested stock (despite its supposed
    purpose of retention and long-term performance reward).
  • More than three-quarters of CEOs still have golden parachutes of at least twice
    annual pay.
GE brings improved incentive compensation to light
But like a light at the end of the tunnel, there is GE, a repeat offender in executive pay, making an important concession following pressure from shareholders. The board agreed to retrospectively apply performance conditions to stock options awarded in March 2010 as a result of "constructive conversations with our shareowners."
Compensation committee members Ralph S. Larsen (chair), James I. Cash, Jr., Andrea Jung, Robert W. Lane, Samuel A. Nunn, Jr., and Douglas A. Warner III had agreed to switch from performance-based awards to time-based. In other words, these elements of "incentive" pay were no longer an incentive to reach certain benchmarks; they became an incentive to wait around until the next draw-down. It is likely that the risk of losing a "say on pay" vote inspired the board to put performance back into performance pay.
What do shareholders want? Say on pay. Every year!
The Dodd-Frank legislation gives shareholders two votes -- an advisory vote on pay and a vote on how often that vote will occur -- every one, two, or three years. While some companies are trying to make it every two or three, shareholders are voting for annual review. The Harvard Law School Corporate Governance Forum reports on the frequency of votes:
Frequency Recommendation
Number Proposed
Supported by Majority of Votes Cast
Annual
24
24
Biennial
9
3
Triennial
52
27
No Recommendation
7
N/A
If you eliminate companies with significant insider ownership, it is even more clear that overwhelmingly, shareholders want to look at pay annually.

And click "Like" if you think CEOs are overpaid
Shareholders are basing their "say on pay" votes on improved sources of information about CEO compensation to decode the jargon and evaluate pay as an element of investment and enterprise risk. This week, Thomson Reuters had a nifty and very telling graphic of the day on CEO compensation at banks, showing major global institutions ranked by pay, revenue, staff, and the ratio of compensation to revenue.

And the AFL-CIO has relaunched its Paywatch site with a searchable online data bank that enables users to get information by state, industry and top-paid CEOs and compare the pay of top CEOs with the median pay of nurses, teachers, firefighters and other workers. They will use social media including Facebook, Twitter, and YouTube to get their message out and build coalitions. Compensation committees should get ready for some more constructive conversations with shareowners -- annually.

Related:

  • Nell Minow

    Nell Minow, a member of the board of GovernanceMetrics International and founder of The Corporate Library, writes about corporate governance issues, focusing especially on CEO pay, executive compensation, shareholder rights and best business practices.You can follow her on Twitter at @nminow.