Executives’ Pay Faces New Tactics

Activist shareholders are trying new tactics to rein in executive pay at U.S. companies, with proposals they hope will appeal to a broader group of investors.

The new strategies include simpler, less prescriptive holder resolutions that don’t dictate executives’ pay packages. Instead, the new proposals seek to more closely align executive pay with corporate performance, and provide more disclosure about pay packages. Holders are also tightening proposals that have proved popular, such as restrictions on “golden parachutes.”

In the past, shareholders concerned about executive compensation — who frequently are allied with labor unions — sought to limit executive pay, sometimes down to the penny. But these proposals typically won little support from other investors, such as mutual-fund managers, and executive pay continued to rise.

“A lot of people had problems with the pay proposals that were too prescriptive,” says Pat McGurn, executive vice president at proxy-advisory firm Institutional Shareholder Services.

Roughly 140 proposals dealing with executive pay have been submitted for annual meetings so far this year, according to ISS. That is down from 276 for all of last year. ISS attributes the decline to changes in accounting rules for stock options, which eliminated proposals on that issue, and efforts by activist shareholders to craft “more targeted and novel” resolutions.

Shareholder proposals allow investors to raise governance and social issues at annual shareholder meetings, which usually take place during the next few months of the year. Some proposals may be thrown out if they are judged to interfere with daily management issues, or withdrawn if the company agrees to the suggestions in advance. Proposals that make it to proxies will be voted on at the meetings. Resolutions are typically nonbinding.

The pension fund of the American Federation of State, County and Municipal Employees, or AFSCME, has submitted a proposal at five companies that would give shareholders a vote on total compensation and pay policies for the top five executives. The vote would be advisory, akin to current practices in the U.K. and Australia.

AFSCME’s proposal targets Merrill Lynch & Co., U.S. Bancorp, Bank of America Corp., Home Depot Inc. and Countrywide Financial Corp. All but Countrywide “have performed poorly related to their peer groups” while offering “generous compensation programs,” says Richard Ferlauto, the union’s director of pension and benefit policy. Countrywide was targeted because AFCSME felt some benefits were excessive, he says.

A spokesman for Bank of America says the company’s performance has been above average, but adds, “We continue to talk with AFSCME about their concerns.” The other companies either declined to comment or didn’t return requests to comment.

Another proposal, from the United Brotherhood of Carpenters, calls for companies to establish “pay for superior performance” standards. The union, which targeted nearly two dozen companies, asks that a company grant executives annual bonuses and long-term awards only when the company outperforms its peers.

The proposal contrasts with the Carpenters’ previous “Common Sense” proposal, which called for limitations on pay, such as caps on grants of restricted stock. Such proposals received, on average, fewer than 15% of votes cast the past two years, according to ISS.

Other proposals seek more disclosure about executive pay, instead of dictating pay practices. Shareholders pushing these proposals say they will proceed despite proposed Securities and Exchange Commission rules that would require more pay transparency as early as next year.

Connecticut’s retirement-investment funds, for example, are pushing resolutions asking companies to disclose all aspects of pay, including the current value of retirement benefits and targets for performance-based pay. One reason the state plans to continue its push: The SEC’s rule, as proposed, wouldn’t require companies to specify the targets that executives have to meet to earn their bonuses, or performance-based equity grants, says Donald Kirshbaum, the investment officer for policy in the treasurer’s office.

It isn’t clear whether the new proposals will be any more successful at reducing executive pay than past efforts. “Every year we hear from pundits that this is going to be the year in which shareholders rise up and actually make a change,” says Greg Taxin, chief executive of proxy-advisory firm Glass, Lewis & Co., in San Francisco. “Unfortunately, we’ve been hearing that for a decade.”

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