Investors target executive salaries
More investors are getting serious about deflating corporate chiefs' ballooning pay.
Lawmakers handed them a sharp implement two years ago — a law that required publicly traded companies to hold so-called “say-on-pay” votes at annual shareholder meetings starting in 2011.
The votes are nonbinding, but experts say they're having a profound effect in corporate boardrooms. They're stirring greater shareholder activism and goading companies to retool pay packages. Some firms that lost votes have cut corporate chiefs' pay or even jettisoned executives.
“It is a day-and-night” difference, said Patrick McGurn, special counsel for Institutional Shareholder Services, an influential consulting firm that advises pension funds and other big investors on say-on-pay votes and other issues at shareholder meetings.
“(Corporate) directors are engaging with investors like they never did before,” McGurn said.
There are signs, experts say, that many firms' boards of directors are working harder to make sure top executives' compensation is closely tied to company profits and stock returns — known as “pay for performance.”
“As you put more pay for performance in the system, it will result in more variability” because pay is tied to how each company does that year, said Joe Mallin, managing director in Atlanta for executive compensation consultant Pearl Meyer & Partners. “That's what everyone wants.”
Until the past few years, however, that's generally not what happened, according to critics.
CEO pay had been soaring for decades at most firms. That's partly because they have lots of levers to pull to justify big raises, critics said.
But after the near-meltdown on Wall Street in 2008 and several corporate scandals, Congress enacted the Dodd-Frank financial reform act, which requires companies to allow shareholders to approve or disapprove top executives' pay packages at least every three years. Most companies hold annual votes.
The votes are nonbinding, but companies do have to report the vote results and later explain what they did about it.
Only 34 firms failed in 2011 and 60 failed last year. So far this year, only about 10 percent of the nation's thousands of public companies have held votes, and more than 90 percent of those have passed.
“I think the thing that people don't appreciate yet is that it has totally changed the dialogue between shareholders and management,” said Randall Thomas, a Vanderbilt law school professor who co-authored a study of the say-on-pay rule. “It will have an impact on companies whose pay practices deviate significantly from the norm.”