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Shareholders Seek 'Say on Pay'

Big payouts to executives of companies hit hard by the credit crisis, like former Citi CEO Charles Prince (left), ex-Merrill Lynch chief Stanley O'Neal (center) and Countrywide CEO Angelo Mozilo (far right) have lifted the 'say-on-pay' movement.

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.


Merrill Lynch


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


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and Angelo Mozilo at

Countrywide Financial


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.

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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

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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.

"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

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, 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.


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

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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.

But shareholders at Goldman's annual meeting on Thursday defeated the say-on-pay proposal. Approximately 43% of the shareholders voted in favor of it, according to the

Wall Street Journal

. Blankfein said that the vote would create "a cloud, a limitation, a restraint" on an important board decision and force a CEO to second-guess pay recommendations to the detriment of shareholder interests, according to the



Goldman's rejection of the proposal exemplifies the uphill battle faced by AFSCME and its consortium, despite the disparity between some executives' pay relative to their peers and companies' performance.

RiskMetrics' Bowie says that while the proposals may get passed, the votes are advisory and not binding, meaning that management is under no obligation to put it on their ballots. RiskMetrics and insurance company


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have already agreed to add a say-on-pay vote to their ballots.


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shareholders supported the proposal by a majority of votes cast in March, but the company has not said when it plans to put it on their ballot.

Other critics say an advisory vote can also be confusing because it is unclear what exactly shareholders would be approving or disapproving. Practical realities, such as the time needed by shareholders to become familiar with a particular compensation plan and its nuances, are another factor.

To be sure, it's easy to see why directors and companies may loathe implementing a ratification of executive pay. Many compensation committees fear losing control and don't want shareholders becoming a referee of sorts on issues that are delegated to the board, observers say.

"Until pretty recently, performance has been pretty good. We have yet to see impact of declining performance," RiskMetrics' Bowie says. "If we do see significant performance declines and there are not corresponding

declines in pay and we continue to see pay increases, then you will start to see a pickup on the say-on-pay proposals, and that is the premise of the concept."