Gas and electric utility Dominion Resources (NYSE:D) announced last week that it is in the midst of a shareholder revolt over executive compensation.

Shareholders hailing from the Utility Workers Union of America (UWUA) and the International Brotherhood of Electrical Workers (IBEW) are proposing to amend the company's bylaws at Dominion's April 23 annual shareholders meeting. If passed, the amendment would require a shareholder vote to approve any payment to company executives in excess of the amount that the IRS permits to be deducted ($1 million in base salary). However, the proposal would not require approval of bonuses and stock option grants.

The catalyst for this shareholder uprising was the revelation that Dominion upped its top executives' 2003 compensation, despite management leading the company to rather disappointing generally accepted accounting principles (GAAP) earnings for the year (down 80% since 2002). In particular, Dominion CEO Thomas Capps received $7.2 million in total compensation for 2003, which was 160% more than his 2002 compensation.

There are just two nagging details that the UWUA/IBEW proposal fails to address:

First, although GAAP profits did plunge in 2003, this resulted from a perfect storm of onetime charges that the company took, specifically:

$2.43 per share related to the company's planned sales of Dominion Telecom and assets of CNG International;

$0.38 in expenses to repair the damage caused by Hurricane Isabel;

$0.25 of asset impairments at Dominion Capital;

$0.20 related to the termination of a power purchase contract;

$0.09 due to accounting changes;

and $0.06 in severance costs related to workforce reductions.

Add all of those hits back into the GAAP earnings and you will see that the company's operating earnings were actually $4.53 per share -- down only 6% since 2002. So the executives' performance was not as horrible as it seems on the surface.

Second, while Capps' total compensation rocketed from about $2.8 million in 2002 to $7.2 million in 2003, the vast majority of that increase came in the form of bonuses and restricted stock issuances. The shareholder proposal would not require a vote on these categories of compensation.

So in sum, the shareholder proposal: (1) arises from a faulty premise, and (2) fails to address the real issue -- non-salary compensation increases. While runaway executive compensation is certainly an issue that should concern Dominion investors, proposals like the UWUA/IBEW's are the wrong way to go about fixing the problem.

Tom Gardner spends his time hunting down small, undervalued companies in Motley Fool Hidden Gems . Want to know more? Take a free, 30-day trial.

Fool contributor Rich Smith owns no shares in Dominion.