Say on Pay: Just a "cruel hoax"?

By Cydney Posner

While some folks may be seeing an "investor spring" (see my email of 6/6/11) for shareholder activism in connection with executive compensation, others seem to have a more jaundiced view of the benefits of say on pay. This article from Business Week notes that, although median pay of CEOs jumped 35% to $8.4 million for S&P 500 CEOs in 2010, the anticipated say-on-pay challenge by shareholders to out-of-line pay packages did not really materialize. In fact, shareholders rejected executive pay at less than 2% of public companies so far this year. According to the article, through June 14, shareholders objected to executive comp at just 32 of the 1,998 companies that have held annual meetings, while ISS has recommended voting no on 293 say-on-pay proposals this year, including Pfizer (severance package for former CEO of $34.4M) and JPMorgan Chase (CEO awarded a 1,474% compensation increase for 2010).

Lynn Turner, a former managing director for research at Glass Lewis and former chief accountant at the SEC, attributes the low ratio of negative say-on-pay votes to the reluctance of mutual funds, which are major shareholders at many companies, to dissent because many large mutual funds run (or want to run) 401(k) plans for these companies. As a result, he maintained that big mutual funds " ‘won't vote against management on compensation unless they're really bad….' "

The article attributes ISS' failure to persuade shareholders to vote no on executive comp to advice from the Center on Executive Compensation. The Center encouraged companies receiving negative recommendations from ISS to send to shareholders rebuttals to ISS arguments (see my email of 4/13/11). Pfizer and JP Morgan both submitted rebuttals to shareholders, as did ExxonMobil (which gave its CEO an $88M pay package over the past three years, when its stock generated a 5.8% negative return). Pfizer received a 57% favorable vote on executive pay, JPMorgan a 73% favorable vote and ExxonMobil a 67% favorable vote. In addition, the Center warned the 100 largest institutional investors in the U.S. about possible "bias and errors" in proxy advisers' recommendations and issued a white paper arguing that ISS has published errors, holds excessive power and is plagued by conflicts of interest because of its dual role as consultant to a number of companies regarding which it issues proxy voting recommendations.

ISS countered that the Center is just another paid K Street lobbyist, and cited GE (which, in response to a negative ISS recommendation, changed the vesting of the CEO's option grant to be performance-based) as an example of how its negative recommendation on a say-on-pay vote helped to foster accountability and engagement. Nevertheless, Robert A.G. Monks, who founded ISS in 1985, has concluded that say on pay " ‘is at best a diversion and at worst a deception….You only have the appearance of reform, and it's a cruel hoax.' "