Shareholders Seek 'Say on Pay'

"Sometimes a plan will lead to payments even when there is poor performance. That's poor design. That's what you're trying to get away from," says Don Lindner, executive compensation practice leader at WorldatWork, a professional association dedicated to compensation and benefits employees.

Little Recourse

Currently shareholders have little say in the decisions made by the board of directors -- particularly on executive compensation packages. The only way for shareholders to voice their objections to pay packages is by withholding votes against directors on a company's compensation committee.

CtW Investment Group, which is associated with Change to Win, a federation of unions representing nearly six million workers in the U.S., is seeking to oust certain directors at several financial companies battered by the subprime mortgage meltdown.

The group is targeting two directors on the board of Washington Mutual(WM Quote - Cramer on WM - Stock Picks), which has twice had to recapitalize its business and downsize in less than six months to resuscitate its struggling capital levels in the wake of losses tied to mortgages.

CtW is broadly supportive of shareholder efforts to rein in pay and ensure that it is aligned with shareholder interests, says Michael Garland, director of value strategy at CtW Investment.

Ferlauto says that a say-on-pay vote would expand on companies' compensation disclosure and analysis documents required by the Securities and Exchange Commission that are part of annual proxy statements. It would create "a narrative explanation that describes for shareholders how compensation is going to drive long-term shareholder value," he says. "That's what we want to know about -- not a particular footnote."

Congress has also taken an interest in say-on-pay proposals. Legislation, which has passed in the House but stalled in the Senate -- likely until at least after the presidential election this fall -- is calling for all companies to offer a say-on-pay vote.

Some say a general mandate would only inhibit firms that currently have good executive compensation practices.

"We think that's unnecessary legislation," WorldatWork's Lindner says. "Individual proposals that shareholders are doing to specific companies probably make more sense ... I'd much rather see that than having a piece of legislation that makes everybody jump through hoops."

AFSCME and others began a crusade on say-on-pay two years ago after filing six proposals to "test the appetite" of investors, Ferlauto says. Last year, the consortium filed 50-plus say-on-pay proposals, averaging a 42% support for the vote, AFSCME said.

"We think that ultimately, this should be a corporate governance best practice that should be adopted basically across the board," Ferlauto says. "I think we're going to do very well across the board."

Getting Closer

Say-on-pay proposals have already been accepted in countries like the United Kingdom, Australia, Sweden and The Netherlands.

"Overseas [it's] part of the culture," Ferlauto says. "There is a much more consultative process there. The boards aren't run by a central power in the form of CEO-chairman. ... You've got independence in the chairman's office that is more open and willing to deal with investors on pay issues and other issues." Share ownership is also generally more concentrated in countries like the U.K., for example, as opposed to larger fragmentation in the U.S.

Of the 90 or so proposals that have been filed, the consortium group identified companies where there was a perceived disconnect between pay and performance, excessive pay, as well as those companies which they say should adopt the advisory vote as part of good corporate governance practices.

Goldman Sachs(GS Quote - Cramer on GS - Stock Picks) received one. Goldman's earnings outperformed many of its investment brokerage brethren, and CEO Lloyd Blankfein was compensated in kind. He made $68.5 million last year.

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