Investors May Get More Input on Executive Pay
Responding to mounting pressure from lawmakers and investors offended by multimillion dollar pay packages for senior corporate executives, the Securities and Exchange Commission on Thursday announced proposed new regulations that would give shareholders greater influence over how much company officers earn.
The move represents a radical departure for the commission, whose chairman, Richard C. Breeden, said at a Washington press conference that the new rules would require companies to disclose more fully and understandably how pay for top executives is determined. They also would allow small shareholders a greater voice on compensation matters by permitting them to submit non-binding proposals regarding executive pay to be considered by all shareholders.
“We think that it’s appropriate for shareholders to be able to let the directors know how they think they’re doing,” Breeden told reporters.
“There may be executives in the United States that are underpaid, and there may be some that are overpaid,” Breeden added. “It’s our view that that decision needs to be made between the shareholders . . . the directors . . . and the management.”
A persistent recession marked by job losses and reduced pay for many employees has turned executive pay--which includes salary, bonuses and stock options--into a simmering political issue. Many shareholders question whether the high pay is deserved, particularly for executives at companies that are performing poorly.
The pay issue was highlighted during President Bush’s trip to Japan last month. He was accompanied by executives from the Big Three U.S. auto makers and other corporations whose pay levels far outstripped those of their Japanese counterparts.
Breeden said he is instructing 10 major corporations--including IBM, Chrysler Corp. and Kodak--that they may not exclude pending shareholder proposals about executive compensation from proxy materials for upcoming annual meetings.
Until now, the SEC did not require companies to allow shareholders to vote on issues related to executive pay at corporate annual meetings. The agency maintained that such issues were part of a firm’s “ordinary business” and not the purview of stockholders.
Breeden cautioned, however, that shareholders will not have veto power over pay packages. The new regulations merely grant them the right to publicly express how they feel about them.
The rule changes will be issued later this year after a period of public comment. They are expected to be in place next spring when most U.S. companies issue their proxy statements and hold annual meetings.
The SEC chief said he had discussed the issue with congressional leaders and Vice President Dan Quayle, who has been critical of bloated executive pay plans--but also of unnecessary regulation.
The commission’s actions are an attempt to fend off more radical proposals currently under consideration in Congress, including legislation to cap executive pay.
The proposals announced Thursday were applauded by shareholders’ advocates as important tools for bringing long-needed pressure on boards of directors.
“The only way to bring executive compensation back down to Earth is through direct shareholder input,” said Ralph Whitworth, president of the United Shareholders Assn., a Washington-based group.
“We think it’s great,” said Kala Gillan, assistant general counsel for the California Public Employees Retirement System, the nation’s largest pension fund with more than $67 billion in assets. CalPERS has been among the major investor groups to challenge executive compensation levels.
Top corporate officers often are reluctant to comment on their own compensation, saying it is a matter for the board of directors, which sets pay levels. But even those who disagree in principle with the SEC’s changes may be hard-pressed to oppose them publicly.
Even so, some business leaders and experts on shareholder-management relations said they were troubled that the new rules might create an avalanche of paperwork and other complications for public companies.
“The market will probably regulate those (executive) salaries better than any government agency could,” said Richard L. Lesher, president of the U.S. Chamber of Commerce.
Said Louis J. Brindisi Jr., a senior partner at the consulting firm Strategic Compensation Associates in New York: “This will lead to proxy chaos. Every special-interst group in the country will flood companies with proposals. Proxies will look like dictionaries.”
And Lourdes Ferreira, a professor at USC’s Graduate School of Management, added that “monitoring is better achieved by a strong board than by proxies overwhelmed by proposals, which can create a lot of wasted time.”
Shareholders have increasingly sought to have a voice in executive compensation issues involving publicly held companies. The SEC said that in 1986, 35 shareholder proposals on compensation and benefits were put forth. In 1990, there were 110.
“The level of public and shareholder concern over the issue of executive compensation has become intense and widespread,” Breeden said.
Over the last two decades, corporations have increasingly adopted pay policies that reward or punish top executives according to the performance of the company. David Larker of the Wharton School at the University of Pennsylvania cites studies of about 450 companies over 20 years that show a strong correlation between profitability and the wealth of top executives. But he acknowledges, “What is unknown is the right level of pay.”
He and others argue that the public might be confusing highly paid with overpaid executives. The overpaid would be those whose companies consistently return below-average payouts to shareholders measured by stock appreciation plus invested dividends.
The revised regulations require company directors to help shareholders evaluate differences between executive pay and a company’s performance by publishing tables that summarize both cash paid and the present value of stock grants or stock options, as well as changes in corporate performance compared with adjustments in executives’ compensation.
The SEC also is looking at tougher accounting standards that would require the stock options executives receive to be charged against company earnings.
Grant reported from New York and Yaquinto from Washington.
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