Time: Giving Investors a Say on CEO Pay (say on pay started by AFSCME!)

[Omaha Steve]

http://www.time.com/time/business/article/0,8599,1729480,00.html

Wednesday, Apr. 09, 2008

By BARBARA KIVIAT

By most accounts, Goldman Sachs is doing pretty well for a financial services firm these days: its stock is down only 14% over the past year, compared to 29% for the currently embattled industry overall, and it earned $11.6 billion in profits in its most recent fiscal year. So does that mean CEO Lloyd Blankfein deserves the $70 million pay package he received for 2007? Maybe. Or maybe not. But at the very least shouldn't public shareholders — the people who actually own the company — get a say?

Timothy Smith thinks so, which is why on Thursday, at Goldman's annual meeting, the senior vice president of Walden Asset Management, which owns 65,000 shares of the Wall Street giant, will stand up in front of thousands of fellow shareholders and make the case for being able to vote on the firm's compensation practices. Smith's gambit is just the latest salvo in the ongoing battle over executive pay, but this time there's a crucial difference: the pressure isn't coming just from politicians and populist crusaders, but also from big institutional shareholders like mutual funds, pensions and foundations — a constituency companies often find difficult to ignore.


Patrik Giardino / Corbis


Investors this year have asked for so-called "say on pay" at some 100 companies, including Coca-Cola, IBM, General Motors, Exxon Mobil, Citigroup, Anheuser-Busch, General Electric and Wal-Mart. As companies hold their annual meetings throughout April and May, some 70 different institutional investors will be pushing to add an annual provision to let shareholders vote up or down on how companies pay their top five executives. Earlier this week, about 150 institutional investors and representatives from companies like Pfizer, Morgan Stanley, Dell, BP, Sara Lee, Fed Ex, Procter & Gamble and United Health gathered in New York for a roundtable on say-on-pay votes. Such votes wouldn't actually be binding, but they still might serve to pressure firms into behaving the way shareholders want them to, especially when it comes to linking pay to performance. "This isn't an attack on companies in general," says Smith. "This is good governance, just like ratification of auditors or majority vote for directors."

The founders of the "say on pay" movement probably wouldn't put it so diplomatically. In the fall of 2005, the American Federation of State, County and Municipal Employees (AFSCME), a union that runs a $850 million pension fund, was trying to figure out what to do about CEO pay — especially at Home Depot, one of its holdings, where then CEO Bob Nardelli was collecting a nearly $32-million pay package for the year, while the company's stock languished. "We had reached a level of frustration because it seemed CEO pay, no matter what we did as activist investors, kept spiraling out of control," says Richard Ferlauto, AFSCME's director of pension and benefit policy. The quintessential example: after Congress passed a law that gave companies incentives to cap CEO base salaries at $1 million a year, the issuance of stock options, an alternative way to pad pay packages, skyrocketed — to the point that by 2005, average large-company CEO compensation had reached 262 times the average employee's take, compared with 24 times in 1965, according to the Economic Policy Institute.

So AFSCME decided to try an approach that had been codified into law in Great Britain three years earlier: "say on pay" votes, a method meant to harness investor sentiment into a unified message more forceful than any one shareholder complaining to a company's board of directors could deliver. After AFSME petitioned for such votes at a handful of companies in 2006, a swath of other investors, including heavyweights like the California Public Employees' Retirement System (CalPERS) and TIAA-CREF, which sells retirement investments to educators, submitted shareholder proposals at dozens of companies in 2007. Of the eight companies that saw majority shareholder votes in favor of instituting say on pay, three —Blockbuster, Verizon and Par Pharmaceuticals — said they would do it.

Most companies, not surprisingly, aren't so amenable to the idea. The core argument against the movement is that CEOs get paid a market rate and say-on-pay votes undermine the very nature of corporate governance — a board of directors charged with luring and keeping the best talent. In the rebuttal statements to say-for-pay proposals found in their annual proxies, companies lay out all sorts of counter-arguments. IBM says there's no way that shareholders can know what's an appropriate pay practice since they're not privy to competitive information like which executives are receiving other job offers. Coca-Cola stresses that shareholders already have a way to deal with pay practices they find unpalatable: don't vote for members of the board when they come up for re-election.

FULL strory at link.

[pinto]

1. Last Sunday's Times had a big spread on CEO compensation and the Say on Pay proposals.

Plus a piece by Ben Stein on the "boardroom buddy system". Though Stein's politics and his tepid suggestions for CEO compensation changes leave me cold, he knows that world well and writes really well.

I'll grab the links and follow up when I have time.

[pinto]

4. 'In the Boardroom, Every Back Gets Scratched' - Ben Stein Essay

April 6, 2008
Essay

In the Boardroom, Every Back Gets Scratched
By BEN STEIN

“Your basic human is not such a hot item.”

— Rachel Epstein (my sister)

START with the obvious. Executive pay at the top levels in this country is stunning in its size and its rate of climb.

According to the Congressional Research Service, average pay for chief executives stood at 179 times average worker pay in 2005, up from a multiple of 90 in 1994. Adjusted for inflation, average worker pay rose by a total of only 8 percent from 1995 to 2005; median pay for chief executives at the 350 largest companies rose 150 percent.

Top executives’ pay as a ratio of their employers’ earnings has also skyrocketed in the last 15 years. And these executives are paid far more than their counterparts at companies of comparable size in Britain or Japan. How did this happen? How did pay grow so fast at the top?

It starts with several corporate governance factors and then goes into psychosocial factors. For one thing, although a company’s stockholders by every legal precept own the company, they have almost no say in how their employees, the executives, are paid. Instead, the pay of the top executives is set by the board, usually the compensation committee. The directors are elected by the stockholders via proxies — those things you get in the mail and then throw away. Thus, in effect, the board is selected by top management, usually by the C.E.O. himself. Once a director is on the board, there is only the slightest of chances that he will leave, except for death or old age or illness.

complete essay at:

http://www.nytimes.com/2008/04/06/business/06ben.html

[pinto]

5. 'Say on Pay: A Whisper or a Shout for Shareholders?' - Claudia Deutsch

April 6, 2008
Say on Pay: A Whisper or a Shout for Shareholders?

By CLAUDIA H. DEUTSCH

TWO years ago, Boston Common Asset Management asked Aflac to give investors a chance to weigh in on top management’s compensation. Daniel P. Amos, Aflac’s chairman and chief executive, was taken aback. “I’m in the typical range of C.E.O. pay, and no shareholder had ever complained,” he said.

But he thought about it and decided, why not? Aflac’s shares were rising, so investors were unlikely to feel vengeful toward management. And even if they did, shareholders were not asking for a mandate, just a retrospective thumbs-up-or-down vote on pay that was awarded the previous year.

So this year, Aflac became the first American company to give shareholders a nonbinding vote on executive compensation, which investors refer to as “say on pay.”

“We want people to look at us and say, ‘Here’s a company that will even let you vote!’ ” said Mr. Amos, who has headed Aflac for 18 years. “It’s symbolic, but it’s an important symbol.”

Indeed it is. Last year, investors filed 60 resolutions asking for a say on pay and got about 44 percent of the vote, on average. This year, there were more than 90 such resolutions filed, and while the final tally is not in, they seem to be getting a majority of the votes.

more at:

http://www.nytimes.com/2008/04/06/business/06say.html

[Initech]

2. What are all these companies doing with these huge profits?

I've never been able to figure this out - are they saving it for a rainy day, making a environment for their employees, or just letting it collect interest?

[Yupster]

7. What can a company do with its profits?

There are a few main things companies do.

1. Give it back to the owners via a dividend.
2. Expand their business by building new factories, spending more on research, etc.
3. Buy back shares so each share is a larger portion of the company.
4. Collect cash.
5. Pay down debt.
6. Bonus to employees (management).
7. Buy other companies.

If you go to Yahoo Finance, you can see a lot about what each company does.

Just as a few examples.

Bank of America (BAC) made $ 3.30 per share in 07.

No big secret what they did with their earnings. They paid out $ 2.56 a share dividend. Makes sense since they aren't building that many new banks or researching anything. I bet they'd like to be aggressively buying back shares now that their stock is down 30 % but with the high dividend which they don't want to cut, there isn't much money for much else.

Exxon (XOM) made $ 7.28 per share.

They only paid out a paltry $ 1.40 a share dividend. My guess is the biggest part of their profits goes toward finding new sources of oil. They also have been buying shares back in recent years pretty aggressively. There are 20 % less shares than there were two years ago . They are also sitting on $ 34 billion in cash.

[lonestarnot]

3. woot! say-on-pay!

[B Calm]

6. It's about damn time someone fights back predatory capitalism!