The decadent days of out-of-control CEO pay, divorced from actual performance, may be drawing to a close. This proxy season, first Motorola
A watchful eye
Say-on-pay policies are non-binding advisory votes; they simply allow shareholders to express their opinion on companies' compensation schemes. A few U.S. companies have voluntarily adopted such policies over the years, and in the wake of the financial crisis, companies that accepted government funds were required to follow suit.
Though they may sound flimsy, evidence suggests that say-on-pay policies could have a tangible impact on their companies' operations. The U.K. has required say-on-pay since 2003. In a 2007 study, the Yale School of Management's Millstein Center for Corporate Governance and Performance showed that although British compensation still rose, the pace was slower, and pay was more closely linked to performance targets. In another welcome side effect, golden parachutes (one of my major pet peeves) also decreased.
A Wall Street Journal article on the topic implies that shareholders' exercise of say-on-pay rights could spur companies and their boards to be more cognizant of investors' opinions and wishes. In addition, I believe that when managers and boards know their shareholders are watchful and engaged, they'll take greater steps to keep pay excesses in check.
Strange but true
Although recent data showed that CEO pay decreased in 2009, this topic isn't cut-and-dried. Some CEOs actually did quite well last year, at least on paper, thanks to options and other stock-based compensation awarded during the market's doldrums. Last year's rally left some corporate leaders with some mind-boggling paper gains.
Bartz's windfall seems a bit strange, given the company's competitive positioning. Yahoo! has fared poorly against a fierce crop of rivals, including Google
And no discussion of CEO-pay largesse would be complete without Abercrombie & Fitch's
Abercrombie's recently filed proxy statement shows that some shareholders have noticed. One shareholder proposal urges the separation of the CEO and Chairman roles (Jeffries currently holds both) to bring on an independent chairman. The proposal notes that The Corporate Library dubbed Jeffries the "Highest Paid Worst Performer" of 2008. Perhaps Abercrombie shareholders will take a cue from Occidental and Motorola, and make their displeasure known with their voting power.
A return to reason
For years, too many mediocre or incompetent chief executives have made too much money. Their cushy salaries didn't just hurt shareholders; at bailed-out firms, their fat paychecks and lousy performance made taxpayers and society at large suffer, too. Let's hope that the growing tide of say-on-pay successes marks an end to the era of entitlement, and a return to rewarding only long-term success.
Say-on-pay votes could make this a pivotal, even historic, proxy season. According to proxy advisory firm RiskMetrics, the Motorola vote marked the first time a U.S. company didn't earn majority support from shareholders during a non-binding vote on compensation. Meanwhile, it appears that Occidental shareholders finally heeded the advice of The Corporate Library, which dubbed the company a "serial overcompensator." In another recent victory for corporate governance fans, PNC Financial
In the long run, shareholders' acknowledgment of pay policy problems, and their vocal outcry when those practices defy common sense, will result in better-built companies, happier investors, and less overall risk.
Check Fool.com next Wednesday for Alyce Lomax's latest column on corporate governance.