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Say-on-Pay Revolution Officially Underway

Melissa Klein Aguilar | March 18, 2008

With the U.S. economy reeling from the sub-prime mortgage mess and the credit crunch, outrage among investors and lawmakers over outsized executive compensation is reaching a fever pitch this proxy season.

Scores of companies are bracing for shareholder proposals in coming months to adopt “say on pay” advisory votes over CEO compensation at the annual meeting. The first of those proposals went to a vote at Apple on March 4. Preliminary results show the measure won a majority of shareholder votes, but the resolution was non-binding and Apple’s board has not said what it will do next.

Carol Bowie, head of the Governance Institute at the RiskMetrics Group, is tracking more than 75 other such resolutions filed so far for the 2008 proxy season. Last year, Corporate America saw 51 say-on-pay resolutions go to a vote, with an average 43 percent support. Resolutions at eight companies—including Verizon, Motorola, Blockbuster, and Ingersoll-Rand—won majority support last year.

Bowie, who calls the results of the Apple vote “really interesting,” says the outcome may be a harbinger of how say-on-pay proposals will fare this year. “Normally, brand new proposals take a while to build this kind of level of support,” she says. “That’s what got everybody’s attention.”


Most intriguing about Apple is that CEO Steve Jobs’ salary is only $1 per year, his leadership has brought enormous returns to shareholders, and yet they still want a say over his compensation. “For Apple to get this kind of result on the proposal definitely signals a continuing concern by shareholders about executive pay generally and wanting to have some kind of voice,” Bowie says. “Once they get majority support for the proposal, there’s certainly a lot of pressure on companies to take some action, though issuers have been very resistant.”

Bowie says one concession some companies have made to get say-on-pay resolutions withdrawn is to join the Working Group on the Advisory Vote on Executive Compensation, a group formed last year by Walden Asset Management; the American Federation of State, County, and Municipal Employees; Pfizer Corp.; and others to study how the approach could be put into effect in the U.S. market. Indeed, Walden has already withdrawn one proposal at Wells Fargo—the only withdrawal to happen so far.

According to RiskMetrics, other U.S. companies expected to face a vote on say-on-pay resolutions at their annual meetings in the coming weeks include the Bank Of New York Mellon, U.S. Bancorp, Waddell & Reed Financial, Morgan Stanley, Goldman Sachs, Electronic Data Systems Corp., Bear Stearns, Coca-Cola, Citigroup, Merck, and Wachovia Corp.

The only U.S. company outpacing shareholder activists on CEO compensation is insurance giant Aflac, which last year became the first company to adopt a say-on-pay advisory vote voluntarily. Aflac shareholders will cast a non-binding vote on the company’s pay-for-performance compensation of the top-five named executive officers at Aflac’s May 5 meeting. It will be the first instance of shareholder say-on-pay voting in the United States.

And in Congress …

Lawmakers, meanwhile, have shown their own interest in CEO compensation. Most recently, at a March 7 hearing, members of a House committee grilled the chief executives and compensation committee chairs of three companies where those CEOs walked away with huge payouts as their companies and shareholders sustained huge losses.


Below is a summary from the House Oversight Committee of its main concerns about the pay packages for Countrywide CEO Angelo Mozilo, Merrill Lynch CEO Stanley O’Neal, and Citigroup CEO Charles Prince.

Angelo Mozilo

Three aspects of Mr. Mozilo’s compensation raise the most concerns. These are (1) the terms of his 2001 compensation agreement; (2) the terms and negotiation of his 2006
compensation agreement; and (3) his stock sales since October 2006. In each area, there are questions whether the actions of Mr. Mozilo and the board advanced the interests of Countrywide’s shareholders.

Stanley O’Neal

When Mr. O’Neal departed Merrill Lynch in October 2007, the board faced four key issues: (1) whether to allow Mr. O’Neal to retire; (2) whether to renegotiate his non-competition agreement; (3) whether to offer him continuing perquisites; and (4) whether to pay him any special severance. The decisions the board made significantly enriched Mr. O’Neal at a time when Merrill Lynch and its shareholders were absorbing large losses. It is questionable whether
these decisions served the interests of Merrill Lynch and its shareholders.

Charles Prince

The Citigroup board made three decisions in November 2007 that significantly enriched Mr. Prince despite the poor performance of the company under his leadership: (1) the board awarded him a pro-rata cash bonus for the 2007 performance year, amounting to $10.4 million; (2) the board allowed him to retain almost $28 million in unvested stock and stock options by letting him retire rather than terminating him for cause; and (3) the board granted him perquisites worth $1.5 million annually. Questions can be raised whether these decisions were in the interests of Citigroup and its shareholders.


House Oversight Committee (March 6, 2008).

The hearing, which focused on CEO pay in the crisis-riddled mortgage industry, marked the second time in less than four months that members of the House Committee on Oversight and Government Reform put CEO compensation under the harsh Capitol Hill spotlight. The committee, led by California Democrat Henry Waxman, also held a hearing last December to examine the role of compensation consultants in setting CEO pay.

The March 7 hearing focused on the payouts given to Countrywide Financial chairman and CEO Angelo Mozilo and to Stanley O'Neal and Charles Prince, the former chairmen and CEOs of Merrill Lynch and Citigroup, respectively. The trio was criticized by some committee members for the huge sums they earned, even as their companies suffered enormous losses.

“Most Americans live in a world where economic security is precarious and there are real economic consequences for failure. But our nation’s top executives seem to live by a different set of rules,” Waxman said, adding: “It seems like CEOs hit the lottery when their companies collapse.”

Countrywide lost $1.6 billion in 2007, and its stock lost 80 percent of its value and now is being acquired by Bank of America. Merrill Lynch lost $10 billion, and its stock lost 45 percent of its value. Citigroup also lost $10 billion, and its stock lost 48 percent of its value, according to a House committee report. O’Neal and Prince resigned last year. Mozilo has said he plans to step down if Countrywide’s acquisition by Bank of America closes.

According to the report, O’Neal left Merrill Lynch with a $161 million retirement package; Prince was awarded a $10 million bonus, $28 million in unvested stock options, and $1.5 million in annual perquisites. Mozilo received more than $120 million in compensation and sales of Countrywide stock.

Waxman, calling the pay the executives received from their companies and their stock sales “extraordinary,” said: “Any reasonable relation between their compensation and the interests of their shareholders appears to have broken down.”

Also among those who testified before the House panel included the chairmen of the compensation committees of all three companies, as well as governance expert Nell Minow, co-founder of The Corporate Library watchdog group.


Minow said shareholders have “no effective way to respond to outrageously excessive pay packages” approved by boards. Measures such as the ability to replace directors through majority voting or proxy access and shareholder advisory votes on compensation would help remedy the situation, she told the panel.

“If compensation committees start getting voted out for signing off on outrageous pay packages, then boards will start to do a better job,” Minow said.

The House of Representatives has already approved a bill that would mandate say-on-pay advisory votes for all public companies. A companion measure in the Senate, sponsored by Barack Obama, still awaits a final vote. The shareholder advisory votes on compensation already exists in various forms in other markets, including the United Kingdom, Australia, the Netherlands, and Sweden.