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Have your say on CEO pay

Shareholders wield their clout over executive packages.

By G. Jeffrey MacDonaldCorrespondent of The Christian Science Monitor / April 16, 2009

This year marks a tipping point in activists' battle to rein in high-flying executive pay.

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More than 100 companies face resolutions at their annual meeting this spring that would give shareholders a chance to vote on executives' pay packages. These "say on pay" votes would be nonbinding. But with the public and Congress livid about bonuses paid to executives at AIG and other government-supported companies, boards of directors would do well to pay attention, shareholder activists say.

"By having more transparency [in executive recruitment and pay negotiations], it's more likely that you'll get a compensation system that will benefit or be in the interest of shareholders," says Brad Barber, director of the Center for Investor Welfare and Corporate Responsibility at the University of California, Davis. "That would lead to a stronger relationship between pay and performance."

But whether say on pay will actually restrict executive compensation remains an open question, say Mr. Barber and other experts.

Momentum seems to be in the reformers' corner. At least five companies in recent weeks have announced plans to hold say-on-pay votes. Mary Schapiro, chair of the Securities and Exchange Commission, has expressed support for shareholders to have an advisory vote on executive pay packages. Congress, through the recent economic stimulus bill, has made say on pay a standard of sorts by requiring it of public companies that receive bailout money through the Troubled Asset Relief Program (TARP). Even President Obama spoke out in favor of it when he served in the Senate.

Support in Washington marks "a fundamental change in the conditions for the adoption of say on pay," says Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County, and Municipal Employees. "This will create an overwhelming momentum for say on pay to become the US market standard.... By 2010, it will be a market requirement for all US-based companies."

For many socially minded activists, say on pay represents a milestone in a long-term quest to empower shareholders and improve corporate governance.

"The say-on-pay movement shows what concerned investors can do when they put their financial clout to work together," says Lisa Woll, CEO of the Social Investment Forum, a network of institutional investors with an interest in social responsibility.

But some scholars aren't persuaded that say on pay is a meaningful win for investors. Investors' ultimate goal – a stronger link between executive pay and company performance – isn't likely to result, since 60 to 90 percent of pay already comes in the form of stock, says Wayne Guay, an executive compensation expert at the University of Pennsylvania's Wharton School of Business. Such ratios mean companies already tie pay to performance to a large degree and may not have much room for improvement.