Shareholders Seek 'Say on Pay'

Editor's note: This is the second story in an occasional series exploring the rise in shareholder activism and its impact on U.S. corporations amid the economic downturn. The first explored reasons behind the trend.

Former Merrill Lynch(MER Quote) CEO Stan O'Neal left the firm in October after $18 billion worth of securities writedowns tied to subprime and other risky mortgages and a plummeting stock price.

For that, he was sent off with $161 million.

O'Neal's retirement package and the lofty pay for fellow humbled CEOs Charles Prince at Citigroup(C Quote) and Angelo Mozilo at Countrywide Financial(CFC Quote) made the trio poster children for rising shareholder anger at the discord between lofty executive pay and lackluster corporate performance.

As the season of annual shareholder meetings gets underway, this year is sure to lend itself to some active, if not downright testy, stock owners speaking out against perceived company injustices, particularly at the banks, brokerages and mortgage lenders. Several large institutional shareholders are coordinating efforts to remedy the situation by pushing for so-called say-on-pay proposals and other measures.

"It's going to be an issue this year. There is no question about it, because there has been criticism of pay packages and pay practices," says Carol Bowie, head of RiskMetrics Group's Governance Institute.

Heavy Losses, Heavy Wallets

Prince, like O'Neal, left his firm with a wallet as heavy as the losses he left behind. He received a parting pay package worth as much as $40 million when he departed last November, even as the banking titan's stock price was stripped in half from a year earlier after $18 billion in securities writedowns and soaring credit costs on soured mortgages.

Mozilo, founder and CEO of Countrywide, the nation's largest mortgage lender, sold roughly $121 million of company stock last year and received an additional $20 million in stock awards at the end of the year. Over the same period, the company's stock tanked by 80%, and it reported earnings losses totaling $1.6 billion in the second half of 2007. Last quarter, it agreed to be sold to Bank of America(BAC Quote).

The extravagant pay packages sparked so much criticism that last month, the House of Representatives Committee on Oversight and Government Reform held a hearing in which O'Neal, Prince and Mozilo were the star witnesses. Many of the details of the pay packages -- which the executives defended as necessary to attract and retain talent and align them with shareholder interests -- were disclosed in a report the Committee issued prior to the hearing.

This year, a coalition led by the American Federation of State, County and Municipal Employees (AFSCME) and Walden Asset Management submitted more than 90 proposals recommending companies implement a shareholder vote on pay. The investors are looking for management-sponsored, nonbinding votes on executive compensation to be presented in companies' annual proxy statements.

TIAA-CREF, a pension fund and retirement service provider for academic, medical and cultural employees, is also pushing say-on-pay proposals.

"A lot of the financial companies in particular had high-compensation programs that were very aggressive that created perverse incentives for risk-taking in the short run," says Richard Ferlauto, director of corporate governance and pension investment at AFSCME. "[CEOs] were getting highly rewarded, but [did] not face any downsides. The risk and the pain were transferred onto shareholders, employees and customers.

"The purpose of the pay vote 95% of the time drives better disclosure [around pay]," he adds. "Five percent of the time, it's about holding directors accountable, saying, 'You did this wrong, and we're upset.' That's the Countrywides of the world."

Observers note that pay packages for executives were likely created when the economy was doing much better. Boards of directors created more favorable packages for top executives to attract and retain top talent. In some cases, the strategy may not have fully considered more difficult economic times.