Congress Got 'Say-on-Pay

NEW YORK ( TheStreet) -- It's easy to bash many aspects of the Dodd-Frank banking reform legislation, but Congress sure got it right when requiring "say-on-pay" for shareholders.

The Dodd-Frank Wall Street Reform and Consumer Protection Act -- signed into law by President Obama in July 2010 -- has certainly created a rocky landscape for the banking industry, with numerous threats to revenue streams and confusing and contradictory requirements -- such as the Volcker Rule -- which even has the Federal Reserve and other regulators scratching their heads.

Under the Securities and Exchange Commission's final rules, publicly traded U.S. companies are required to provide shareholders with an advisory vote on executive compensation at least once every three years, and beginning in 2011, with shareholders also voting to decide whether to hold say-on-pay votes annual, every two years, or every three years.

The rules also require "say-on-parachute," with companies required to provide additional disclosure regarding compensation arrangements with executive officers in connection with merger transactions."

While the shareholder advisory votes are non-binding, former Citigroup ( C) Chairman Richard Parsons wasn't just pandering when he said on April 17 that shareholders' vote against the company's 2011 executive pay package -- which included total compensation of $14.9 million for CEO Vikram Pandit -- was a "serious matter."

Coming out of the credit crisis, following government bailouts and obscene losses for long-term investors, the last thing a large bank wants is a shareholder lawsuit against its executive pay packages. While Citigroup's board of directors hasn't yet taken any action to address shareholder concerns, investors expect the company to meet with some major stockholders and try to sort out an agreement.

Investors traditionally neglect to send in their annual proxies, leaving their brokers free to vote on their behalf, usually rubber-stamping whatever a company's board of directors decides to recommend. This is obviously changing in the wake of Dodd-Frank, and this can only be a good thing.

Mark Poerio -- a partner in the employment practice at Paul Hastings -- points out that even an advisory vote has "high litigation risk," since during 2011, "there were 40 companies that failed to get a majority vote" on say-on-pay, with "about 20% of the companies failing to get a majority vote getting sued for breaching fiduciary duties."

Citigroup is now "on the radar screen for a shareholder derivative action by disgruntled shareholders," according to Poerio, who added that "the Citi vote was a surprise," since the company went from 93% shareholder approval of its 2010 executive pay package to only 45% approval last week for the 2011 pay package.

The eight shareholder lawsuits following "no" votes on say-on-pay during 2011 "pretty well had no traction," according to Poerio, who said that "only one has moved beyond a motion to dismiss," but it would seem that executives of large companies really can't afford these court battles. After all, disgruntled shareholders could vote with their feet, hurting the share prices supporting the generous stock options awarded to the executives.

After Encore Bancshares ( EBTX) of Houston agreed on March 6 to be acquired by the privately held Cadence Bancorp for roughly $250 million in cash, Encore on March 12 disclosed $6.4 million in "outstanding equity awards" to executives and board members, "that vest in connection with the merger."

If the merger deal is approved, four executives named in Encore's will each receive "a lump sum payment equal to two times the sum of (a) the executive officer's annual base salary plus (b) two times the average of all bonus, profits sharing and other incentive payments made by Encore or the employing entity to the executive officer over the prior two years." Including benefits, Encore said on April 12 that the golden parachutes for these executives would total $6.6 million.

If Encore's shareholders fail to approve the merger with Cadence, Encore faces a $9.9 million breakup fee.

After filing its special meeting proxy statement on April 12, a group of investors sued Encore's board of directors and Cadence Bancorp, demanding "compensatory and/or rescissory damages," saying the merger deal "protects and advances the interests of Encore's directors at the expense of Encore and Encore's public shareholders," and that the conflict of interest among Encore's directors because of the equity awards and executive parachutes "caused these directors to be unable to fairly and thoroughly evaluate the Sale Agreement to ensure that a sale at this time is in the best interests of Encore and its shareholders"

Poerio called the lawsuit a "healthy reminder that, although the Dodd-Frank Act's Say on Parachute disclosure and vote are not expected to derail transactions, they involve sensitive disclosures that warrant up-front diligence and thoughtful presentations to shareholders."

The Wall Street Journal reported on Wednesday that shareholders of FirstMerit ( FMER) had rejected the company's 2011 executive compensation package, and that proxy-advisory firm Glass Lewis had previously recommended that shareholders of FirstMerit and Citigroup reject both companies' pay plans.

Other regional bank holding companies previously reported by the Journal as having Glass Lewis recommend "no" votes on pay, included Huntington Bancshares ( HBAN), whose CEO Stephen Steinour is slated to receive total compensation of $6.45 million for 2011. Huntington's shareholders approved the company's 2011 executive pay package on Thursday.

A spokesman for Glass Lewis says the firm is recommending shareholders vote "Yes" for the 2011 pay package for Bank of America ( BAC). The vote will take place at the company's annual meeting in Charlotte, N.C., on May 9.

Bank of America CEO Brian Moynihan is slated to receive total compensation of $8.1 million for 2011, increasing from $1.9 million in 2010. CFO Bruce Thompson's 2011 compensation package totals $11.1 million, declining from $11.4 million the previous year, while vice chairman Charles Noski's 2011 package totals $6.4 million, increasing from $1.1 million in 2010.

In addition to Huntington, Hudson City Bancorp ( HCBK), FirstMerit and Associated Bancorp ( ASBC), whose shareholders were advised by Glass Lewis to vote "no" against pay packages, as reported by the Wall Street Journal last week, Glass Lewis also recommends shareholders vote against pay packages at these regional banks:

Capital One Financial ( COF) - Shareholders will vote on May 8, with CEO Richard Fairbank slated to receive total compensation of $18.7 million for 2011, increasing from $14.9 million for 2010. Glass Lewis said that Capital One "was deficient in linking pay with performance," that its compensation committee "had not effectively serviced shareholders," and that shareholders should use the vote "to express their concerns regarding the Company's executive compensation."

TCF Financial ( TCB) - Shareholders will vote on Wednesday, with CEO William Cooper slated to receive total compensation of $8.9 million, increasing from $2.1 million the previous year. Glass Lewis said shareholders should vote against TCF's compensation plans since the company "does not utilize a sufficiently objective, formula-based approach to setting executive compensation levels."

CapitalSource ( CSE) - Shareholders will vote on Thursday, with Co-CEO Steven Museles slated to receive total compensation of $2.6 million for 2011, increasing from $1.3 million in 2010. The other Co-CEO, James Pieczynski, is slated to receive total 2011 compensation of $1.3 million, matching his 2010 compensation. Glass Lewis said that "shareholders should be concerned with the Company's failure to implement a performance-based long-term incentive plan with objective metrics and goals," and also based its recommendation on "excessive severance payments" for executives, along with "excessive promotion payments."

Boston Private Financial Holdings ( BPFH) - Shareholders will vote Thursday, with CEO Clayton Deutsch slated to receive total compensation of $2.8 million for 2010, declining from $3.7 million in 2011. Glass Lewis said that the company "has not provided a sufficient discussion" regarding "performance goals under both short- and long-term incentive plans," that "shareholders may have difficulty determining how performance translated into payouts," and that Boston Private "has exhibited a consistent failure to align executive pay with performance."

Sterling Bancorp ( STL) will hold its vote on May 3, with CEO Louis Cappelli slated to receive total 2011 compensation of $5.2 million, increasing from $4.0 million a year earlier. Glass Lewis said that "in fiscal year 2011 the Company was deficient in linking pay with performance," and that "the board has failed to provide shareholders with sufficient information with which to better evaluate the Company's executive compensation practices and procedures."

PacWest ( PACW) will hold its shareholder vote on May 9, with CEO Matthew Wagner slated to receive total compensation of $4.2 million for 2011, increasing from $3.4 million in 2010. Glass Lewis said that PacWest "has provided adequate disclosure with respect to its compensation policies and incentive plans," however, long-term incentive payments are "based on a simple performance hurdle," adding that "a more rigorous performance formula that bases payouts on the extent to which the Company exceeds challenging performance targets or thresholds would better align the long-term interests of management with those of shareholders."

Douglas Ormond, a veteran Wall Street portfolio manager at New York-based hedge fund Otlet Capital has a differing viewpoint on two of the above companies, saying "the Capital One CEO is the founder and builder of the company and has steered it through the financial crisis, while TCF Financial's CEO came out of retirement to save the company. Both have time and time again proven themselves not to be sellers."

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.