The California State Teachers Retirement System has called on 300 of its largest portfolio companies to develop more responsible executive pay policies in light of the economic crisis, and to allow shareholders advisory votes on those policies.

CalSTRS, the second largest public pension fund in the United States with $111 billion in assets, said its goal is to reward long-term thinking on compensation and improve pay-for-performance practices while deterring excessive risk taking. “CalSTRS has a long history of promoting responsible compensation policies that link pay to performance and align shareholder and management interests,” says Anne Sheehan, the fund’s director of corporate governance.

As part of its initiative, CalSTRS has published executive compensation model policy guidelines. The guidelines call for companies to take a five-part approach:

  •  A clear, overarching philosophy that aligns the interests of shareholders and management; 

  • A well-designed, comprehensive compensation policy that takes a detailed look at all of its components; 

  •  Transparency through a plain-English description of a well-crafted compensation plan;

  •  Accountability through a responsible compensation committee; and

  •  A compensation committee comprised of independent directors using only independent advisors and consultants.


“Our model policy and principles for executive compensation seek to bring coherence to an exceedingly complex issue,” Sheehan says. “There are no easy answers to addressing the problem of poorly aligned executive compensation. But nothing can be achieved without the communication and agreement between companies and shareholders called for in our guidelines.”

CalSTRS said it would follow up with targeted companies through stepped-up communications, emphasizing use of the guidelines. If necessary, the pension fund said it would ultimately withhold proxy votes on directors and compensation plans.