Executive compensation is a prominent topic in corporate governance in the
This issue is not unique to the
On 22 December, 2006, the US Securities and Exchange Commission (SEC) revised its requirements for disclosing options and stock-based awards made to executives and directors. These changes put into effect significant executive and director compensation disclosure requirements effective for the 2007 proxy statement submissions. The SEC rules provide for more accurate disclosure and information gathering of executive compensation. In addition, the SEC has required companies to strengthen their communications with shareholders on compensation.
Consultants spell conflict
A recent
On 5 December, 2007, the committee issued a report on Fortune 250 companies that determined companies with the largest conflicts of interest with their compensation consultants (as measured by other work the consultants did for the company) tended to offer higher executive compensation packages. A copy of the report is available online at www.oversight.house.gov.
In light of this report and as a matter of good corporate governance, US companies are currently reviewing the scope of work that consultants provide to them. The committee also recently sent letters to 250 of the largest public companies in the
Shareholder ‘say on pay’
Executive compensation decisions are typically made by the board of directors of publicly-traded companies; shareholders do not normally have a say on how senior executives are paid. In light of the recent series of executive pay packages featured in the worldwide media, however, measures introduced to curtail executive compensation pay have been gaining traction.
Since 2006, union pension funds and institutional investors led by the American Federation of State, County and Municipal Employees (AFSCME), financial services company TIAA-CREF and Walden Asset Management, as well as institutional investors such as the Counsel of Institutional Investors, have been seeking legislation in Congress to require an annual non-binding shareholder vote on all aspects of company executive compensation programmes.
In April 2007, Senator Barack Obama introduced the Shareholder Vote on Executive Compensation Act — also known as the ‘Say on Pay’ Act — which requires that public companies submit executive pay plans to an annual non-binding shareholder vote. The Bill also requires enhanced disclosure of golden parachute agreements in proxy materials relating to merger or other business combination or sale and requires a separate shareholder vote on the agreement.
This Bill does not limit executive compensation, but it does require an advisory shareholder vote on executive compensation packages. The vote is non-binding, taking the form of a shareholder resolution proposed annually by management on the company’s executive compensation disclosures. The advisory vote would provide shareholders with a ‘say on pay’ and supporters of the legislation argue that it would also provide boards with an opportunity to engage shareholders in meaningful discussions about “appropriate levels of executive compensation”.
On 20 April, 2007, the ‘Say on Pay’ Act passed the House of Representatives by a vote of two to one (269 positive votes versus 134 votes against). Almost all Democratic representatives and approximately one-third of the Republican representatives supported the legislation. While the passage of the Act was not surprising (the Democratic Party was in control of the House of Representatives), what was surprising was the number of Republicans that also supported the Bill (55 votes) — a number sufficient to override a presidential veto. The same day the ‘Say on Pay’ Act passed in the House, Senator Obama introduced a companion Bill (S.1181) in the Senate. The Bill is still pending before the Senate Banking Committee. The ‘Say on Pay’ Act has not yet been considered in the Senate and commentators wonder if it will ever become law. If it does get through the Senate, President Bush has indicated that he will not sign it into law, arguing that Congress should not dictate the process by which executive compensation is approved.
Despite these obstacles, ‘say on pay’ is quickly becoming a key presidential campaign issue. Presumptive Democratic presidential nominee Senator Obama is obviously a strong supporter. Recently, presumptive Republican presidential nominee Senator John McCain, who typically has opposed steps to curb executive pay levels, also voiced his support for ‘say on pay’ on the campaign trail. Although Senator McCain wants to encourage companies to give shareholders a say, he is not, in accordance with party line, officially supporting legislating the concept.
Senator Hillary Rodham Clinton, who recently suspended her campaign for the Democratic nomination for President, has also introduced a bill that would give shareholders a non-binding vote on executives’ pay packages. The Clinton Bill requires top executives who collect large performance-based pay packages to return the money if financial irregularities are discovered and companies are forced to restate their earnings. The Bill also caps the amount that top executives can earn tax-free through deferred compensation.
In parallel with lobbying for this key legislation, proponents of ‘say on pay’ have also filed non-binding shareholder proposals at targeted companies and have taken a proactive approach to the ‘say on pay’ initiative.
During the past proxy season, it has been reported that approximately 300 companies adopted provisions that allow them to recover executive pay that they determine is based on incorrect financial statements. Such clawback provisions are not common in most companies. In addition, supporters of the ‘say on pay’ initiative filed more than 60 shareholder resolutions during the 2007 proxy season seeking such a vote. The main supporting argument is that a shareholder vote on executive compensation is necessary to increase communication and discussions between the shareholders and corporate management to ensure the board considers shareholders’ views on executive compensation and limits increases in pay.
‘Say on pay’ is also gaining traction among investors in the
Despite recent decisions to give investors non-binding votes on how executives are paid, this year’s numbers for advisory pay resolutions are about the same as last year, according to expert reports. RiskMetrics notes that ‘say on pay’ proposals received fewer votes at US companies where they were considered for a second year. But it would be premature to say the issue is off the table. Commentators feel these numbers represent the overall lack of agreement on the best way to curb excessive payouts and indicate that the key priority is to link compensation closer to executive performance.
The way ahead
In May 2008, shareholders of the insurer Aflac affirmed up to nearly $15m (£7.5m) in compensation for its chairman and chief executive officer in the first stockholder vote on executive pay by a major
It is anticipated that executive compensation pay levels will continue to attract attention, not only in the
Frances Phillips Taft is a US- and UK-qualified attorney and special counsel at Faegre & Benson.
USFirmsInLondonJuly2008