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Compensation critics are pressuring companies to hold advisory votes on executive pay packages. Supporters believe that large shareholder votes against excessive pay will influence compensation committees to better align pay with performance. The UK has passed legislation requiring advisory votes, and the US House may do the same. Proponents argue this accountability strengthens the link between executive pay and performance. However, others note performance targets are sometimes easy to meet, undermining that link.
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- 1. PAY FOR PERFORMANCE Compensation but not necessarily curb executive pay, the SEC is requiring greater disclosure on compensation. Early adoption of that practice is evidenced by the new GE proxy statement, which is worth a look if you practice in this area. On another front, the newly Dem- ocratic Congress has been much more active than the SEC on compensation. RECONSIDERING Congress has introduced legislation that will reduce the use of supplemen- tal executive retirement plans and the amounts that can be saved in deferred compensation. While Democratic COMP Congressman Barney Frank wants the shareholder power to veto executive pay, there is more support for a re- quirement of an advisory vote. The United Kingdom has passed legislation requiring an advisory vote on executive pay, and it is likely that Compensation critics are pressuring our House of Representatives will do the same. This has increased discus- companies to hold advisory votes sion between compensation commit- tees and shareholders, and some on excessive pay. BY ARTHUR KROLL believe that the accountability of compensation committees is in- creased by these votes. I believe that ts no secret that some institu- ing on the company, the hope is that U.K. total compensation for CEOs of I tional shareholders, especial- ly hedge funds, governmental pension plans like CalPERS and others, and unions are speaking out on so-called excessive executive paymaking the job of sitting on a compensation commit- a large vote against excessive pay will influence compensation committees and serve to make compensation more in line with payment for true performance. Both activists and com- pensation committees once thought that stock options accomplished that public companies has grown faster than U.S. pay. However, U.K. pay is still lower than U.S. pay and CEOs in the U.K. report to an executive chairman who is not a lead director but has executive functions. Stephen Davis, a fellow at Yale tee even harder. In the past the atti- objective. But because stock markets School of Managements Millstein tude was, Dont like the CEO have been found to perform well in Center for Corporate Governance compensation? Sell the stock. No excess of executive performance and and Performance, believes that legis- more. At least 60 companies are cur- sometimes very poorly when manage- lation requiring an advisory vote TODD DAVIDSON PTY LTD/GETTYIMAGES.COM rently or have recently demanded an ment has done well, this is no longer strengthens the link between pay and advisory vote by shareholders on the case. Whats more, the latter case performance. An example sometimes whether excessive pay exists. Their sometimes prompts repricing of used is that salary has not gone up but targets include Citigroup, Wells Far- options so that executives win if the bonuses, which are based on perform- go and Company, Aflac, Northrop stock goes up excessively and to not ance, have increased. I take issue with Group and WellPoint. lose if it goes down. this conclusion because if bonus goals While the advisory vote is not bind- In an effort to improve transparency are easy to meet or not disclosed, then 30 www.chiefexecutive.net July/August 2007 CEO Magazine July/August 2007 31