Rewarding American bosses(Nay on pay)

IT IS too soon to call it a trend, but the fact that America’s normally passive shareholders have voted against executive pay packages at two big companies within a week suggests that something is going on. The 54% of votes cast against the remuneration of Sanjay Jha, Motorola’s chief executive, at the phonemaker’s annual meeting on May 3rd, marked the first time that American shareholders had ever rejected a boss’s pay. Four days later they did it again, voting against the wages of Ray Irani, boss of Occidental Petroleum.

Such expressions of discontent are unprecedented in America, not least because until recently no one bothered to ask shareholders to approve executive pay. Last year was the first time a significant number of American firms gave shareholders a “say on pay”, although the votes are usually not binding, and many of the firms that have adopted them were forced to do so as a condition of a government bail-out. This year around 300 big companies are giving shareholders a vote. If certain proposals in the financial-reform bill now before Congress become law, say on pay will become the norm for American public companies, as it already is in Britain.

In 2003 Jean-Pierre Garnier, the chief executive at the time of GlaxoSmithKline, became the first boss to lose a shareholder vote under the say-on-pay rules adopted in Britain a year earlier. The first two Americans to suffer the indignity of defeat made obvious targets. The $52.2m that Occidental paid Mr Irani for his services in 2009 not only made him the highest-paid boss at America’s 200 biggest firms; it also made him one of the most overpaid, once the performance of his firm’s shares is taken into account. Graef Crystal, a veteran analyst of undeserved executive pay, had singled out Mr Irani’s package for criticism on the grounds that the payment was in cash and that Mr Irani’s performance targets had been lowered.

As for Mr Jha, Motorola’s board seems to have ignored the shot fired across its bow by shareholders last year, when over one-third of them opposed his pay package. The board’s decision to give him a stake of up to 3% in the company he will run if Motorola is split in two, or a guaranteed payment if the planned break-up does not happen by June 2011, seems to have provoked the No vote.

One test of the significance of the two reversals will be how the boards of Motorola and Occidental respond. So far they have only issued boilerplate comments, promising to engage with shareholders “to get a better understanding of any specific concerns they may have” (Motorola) and to use their input to “re-evaluate the company’s compensation philosophy, objectives and policies” (Occidental).

Another test will be how widespread shareholder activism on pay becomes. Saying no to the greediest outliers may have little impact on remuneration at the average firm. “I’d have liked to see more No votes at other companies,” says Nell Minow of the Corporate Library, which conducts research on corporate governance. She had expected pay at firms bailed out by the government to come under close scrutiny from shareholders, but so far that particular dog has failed to bark.

In Britain, No votes have remained a rarity since shareholders snubbed Mr Garnier. Indeed, it was not until last year that another pay package got a majority of No votes—that of Royal Dutch Shell’s senior executives. However, activists argue that the right to vote on pay has led to far more consultation of shareholders by boards seeking to ensure that pay packages will not be controversial.

Lucian Bebchuk of Harvard Law School argues that shareholder rights in general are less strong in America than Britain, “so there may be less pressure on boards to react to signals sent by shareholders.” It is much harder for American shareholders, for example, to force out recalcitrant directors. So much will depend on two other reforms currently under consideration in Congress. The first would require would-be directors to win a majority of votes cast to secure seats on a board. At present at many American firms, directors can be elected despite overwhelming opposition if no other candidates win more votes—something that is quite common because it is hard to get onto the ballot in the first place. For that reason, the second reform would make it easier for shareholders to nominate candidates.

Thus empowered, shareholders should be able to sling off the board members of compensation committees who ignore their advice on pay. In particular, they would be likely to target the chair of the compensation committee—people such as Spencer Abraham, a former energy secretary and senator who holds the position at Occidental, and Samuel Scott, a former boss of Corn Products International, at Motorola—who are arguably more to blame for excessive pay packages than the bosses who receive them.

"If certain proposals in the financial-reform bill now before Congress become law, say on pay will become the norm for American public companies, as it already is in Britain."

Gotta feeling a lot of freepers wont be liking the new norm.

Letting shareholders cast votes on matters like this will be a complete disaster. Direct democracy never works anywhere. The whole purpose of having a board of directors is to have them exercise their authority in the management of the company.

Then I guess the shareholder shouldn't be sent voting proxies, right? Or, allowed to vote on the board members?

Some want it both ways. I have heard over and over that if "shareholders vote them out so be it".

Now that the shareholders are paying attention and speaking their mind it's "take the vote away"?

Bingo.

And theoretically as a shareholder, what would be my reason to vote to increase any company member's pay, ever? A dollar in their pocket is one out of mine.

Foolishness. I trust the board (in general, and vote against them when I don't) to represent my interests when it comes to senior management, just as I trust senior management to effectively run the company.

I like the system where a CEO make 50 million and another guy in the same company makes 50k.

So we both agree this proposal is garbage.

If an extra dollar in management's pocket is one out of yours -- then there is no reason to increase their pay.

There is no shortage of caretaker managers. There is a distinct shortage of entrepreneurial visionary leaders. Most of the former are probably grossly overpaid, currently. The later can justify their pay, by showing that they add more value to the company, than anyone willing to work for less.

Shareholder votes are proportional to the investment in the company. Most large shareholders are savvy enough to distinguish between overpaid plodders, and star performers.

Shareholders vote for board members, along with any other questions that may be presented by the board to the shareholders for their votes under the bylaws of the corporation.

Shareholders do not vote on matters related to the management of the company, as a matter of course . . . for the same reason why this country would cease to function if everything were left up to the direct actions of the voters.

Also . . .

The term "vote them out" refers to the removal of board members, not the hiring/firing of company management.

Believe me -- if you let the shareholders cast votes on things like this, you're going to end up selling off your entire stock portfolio because you will tear out your own hair after several months of witnessing just how ignorant your fellow shareholders are when it comes to managing their own companies.

It had always perplexed me when I worked for failing companies where the CEO got premium pay, bonuses, and a golden parachute, even as the company went bankrupt (often followed by another offer to come and run another company, which he/she also ran into the ground).

From what I see, this is the case at least half the time.

Hey, the Detroit Lions paid Wayne Fontes to fail as Coach for eight years, and Matt Millen to fail as GM for eight more. It’s their money.

On the other hand, Congress can be counted upon to fail 100% of the time.

The life lesson I learned from it all: Don’t work for idiots!

Hey, the Detroit Lions paid Wayne Fontes to fail as Coach for eight years,

At least Cocaine Wayne got us to the NFC Championship Game, and whupped some Cowboy butt in the playoffs.

Yes, I was living in Michigan at the time, and thoroughly enjoyed that!

I remember the biggest thing about Lions Football at that time was that they had wasted high draft picks on Rodney Peete and Andre Ware at quarterback. The only question was “what third-string white guy off the waiver wire was going to be the starter by game five?” (any resemblance to Donovan McNabb being purely coincidental...)

Yes, I was living in Michigan at the time, and thoroughly enjoyed that!

I was living in Dallas at the time, and it was even more delicious.

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