Down to Business: Executive pay draws anger from investors

“Named and shamed.”

“Named and shamed.” It’s not the kind of label a company embraces, like earning a “best” accolade for a family-friendly workplace. No, what KeyCorp, Motorola and Occidental Petroleum shared last month were investors unhappy with the companies’ executive pay plans.

Lumping them together as “named and shamed” was a senior researcher at The Corporate Library, a Maine-based group that lobbies for good-governance practices at public companies. It also watches for actions likely to provoke shareholder anger during annual meeting season — not the loud, red-in-the-face kind but the tsk-tsk of disapproval as investors vote their shares contrary to the recommendations of the board of directors.

That happened at the Motorola, Occidental and Key meetings, where shareholders told the companies they didn’t like the way top management was compensated. Their votes, known as “say on pay,” were advisory only — meaning no CEO’s paycheck was endangered — but nonetheless delivered a black eye.

The Wall Street Journal said the rejections at cellphone manufacturer Motorola and oil-and-gas producer Occidental were the first ever for big U.S. companies. RiskMetrics, a proxy advisory firm, said banker Key, which has deep roots in the Capital Region, became the first participant in the government’s Troubled Asset Relief Program to lose such a vote, which is required at companies that took TARP money.

“Say on pay” has been a hot-button issue this decade as executive compensation climbed into the stratosphere. At first, it was activist shareholders who demanded the advisory vote; more recently, companies themselves proffered “say on pay” resolutions. The number of proposals put to a vote at annual meetings climbed from about seven in 2006 to about 300 this year — although many of those were at companies that received TARP assistance during the depths of last year’s financial crisis.

Next year, though, advisory votes on executive pay could be required at most or all public companies, depending on the outcome of negotiations in Washington on legislation to prevent another financial meltdown. The Senate and House of Representatives both have “say on pay” provisions in their version of the bill that would overhaul U.S. financial regulations; a conference committee convened last week expects to get final reform legislation to President Obama by July 4.

So the nose-thumbing that shareholders gave Key, Motorola and Occidental could be just the beginning.

At each, investors found fault with something in the executive pay package: the huge payday for Occidental’s CEO, about $52.2 million in 2009, some three times what peer companies paid their top executive; the large annual bonuses guaranteed to Motorola’s co-CEO, despite how well (or poorly) the company performed; the big jump in pay for Key’s CEO, up 40 percent, even as the company lost $1.6 billion last year.

“Say on pay” has been in place in the United Kingdom since 2002, so attention often turns there to evaluate its effectiveness. And while an occasional clash on pay has occurred, “In most cases in the U.K. today, companies regularly work closely with shareholders to ensure that there is full agreement on pay issues … prior to the annual meeting,” says Paul Hodgson of The Corporate Library, the senior researcher who dubbed Key and the others “named and shamed.” Such company-board-shareholder conversations likely will occur more often in this country, too, as “say on pay” becomes standard practice. And then there won’t be a need to name and shame companies offering out-of-proportion CEO pay.

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