Shareholders to Vote on Executive Pay?

From the Los Angeles Times

House wants investors to vote on executive pay
Some lawmakers highlight the vast gap between CEOs and their workers. Others say Congress should stay out of corporate affairs.

By Jonathan Peterson
Times Staff Writer

April 21, 2007

WASHINGTON — The House sent a message to corporate America's plushest executive suites Friday: It's time to put your pay packages to a vote.

Lawmakers voted 269 to 134 to require public companies to put executive pay packages before shareholders for an advisory vote. Business groups lobbied against the measure, saying it would allow special interests such as labor unions to meddle in management decisions.

The bill also faces opposition from the White House and an uncertain future in the Senate. But supporters say the House vote succeeded in elevating popular displeasure with lavishly paid executives to a national issue of economic justice, alongside taxes, wages and trade.

"It's a wake-up call for corporate America," said Amy Borrus, deputy director of the Council of Institutional Investors. "Companies should take this matter seriously. It has a head of steam."

Indeed, the House vote is the latest in a series of developments that underscores growing concern over multimillion-dollar pay plans that sometimes bear little relation to performance.

The Securities and Exchange Commission approved stricter disclosure requirements that take effect this year in an effort to make executive compensation more transparent. And shareholder resolutions demanding advisory votes on compensation are increasingly common at corporate annual meetings.

Although most of these measures are rejected, shareholder advocates recently notched a few victories on the compensation front. In January, Robert Nardelli was ousted as chief executive of Home Depot Inc. in part because of criticism of his pay. He received more than $140 million over six years, even as the value of the home improvement retailer's stock sank.

Close observers maintain that the issue's potency derives from a sense that average American workers are struggling to pay their bills and seeing their retirement and health benefits diminish.

"By every measure, there is increasing discontent in our country about income inequality generally — and CEO pay specifically," said Damon Silvers, associate general counsel of the AFL-CIO. "I think passage of this bill is very significant."

Under the House plan, which would take effect in 2009, the compensation of a company's five top executives would be placed before shareholders each year for a nonbinding vote. Such a vote would force corporate boards to consider the repercussions of outsize pay packages before they approved them, advocates said.

"We don't think boards of directors will lightly disregard an advisory opinion from the shareholders," said Rep. Barney Frank (D-Mass.), sponsor of the bill and chairman of the House Financial Services Committee.

Republican opponents argued that government should stay out of corporate affairs and that the bill could encourage more companies to abandon the public markets and become privately held.

In addition, opponents said that the stricter disclosure rules mandated by the SEC should be given a chance to work before government ratchets up its involvement.

"I'm all in favor of a shareholder vote, if it's done without a mandate from Washington," said Rep. Tom Price (R-Ga.).

Others argued that although the bill was narrowly centered on giving shareholders a say on pay, the real issue debated Friday was the widening pay gap between the cubicle and the executive suite.

"There is a hue and a cry from the American people across the American landscape that is saying something must be done," said Rep. David Scott (D-Ga.).

Frank singled out the $210-million "goodbye kiss" Nardelli received when he was forced out at Home Depot.

"Suppose Mr. Nardelli had been sent out into the cold, hard world with only $50 million for the rest of his life?" Frank asked.

Other examples abound. Lee Raymond, former chief executive of energy giant Exxon Mobil Corp., received a retirement package valued at $400 million. Ray R. Irani, CEO of Los Angeles-based Occidental Petroleum Corp., took home more than $460 million in compensation in 2006, according to regulatory filings.

And former KB Home CEO Bruce Karatz, who retired from the Los Angeles company under a cloud last year after a stock option controversy, could walk away with as much as $175 million.

Although such deals are the exception, they dramatize a trend since the 1990s. Executive pay has soared as rank-and-file workers have seen little growth in their wages.

Average pay for chief executives amounted to 107 times the average worker's earnings in 1990, according to United for a Fair Economy, a nonprofit advocacy group. The gap rose to 525 times average earnings by 2000, reflecting the value of stock options as the stock market boomed in the late 1990s.

As of 2005, the average CEO was earning 411 times as much as the average worker, the group said.

At the same time, public opinion polls suggest widespread cynicism about the way corporations parcel out their wealth.

In a recent survey by Lake Research Partners, almost seven in 10 respondents agreed with this statement: "When corporations are profitable, the benefits are not shared with workers but go only to the top."

Part of the resentment may arise from the view that executive compensation contrasts sharply with the limited benefits that go to workers, who can be devastated by a layoff or an illness.

"The perception is that average workers and CEOs are vulnerable to some of the same risks, but the CEOs are having those risks managed for them much more generously," said J. Mark Iwry, a former Treasury official and scholar at the Brookings Institution.

In March, the Council of Institutional Investors, which comprises more than 135 pension funds with more than $3 trillion in assets, urged companies to adopt advisory shareholder votes on their compensation standards. Such measures have been raised at several corporate meetings this year and 36 more are pending, according to Institutional Shareholder Services.

Even nonbinding votes "are a way to signal to boards that investors are not happy with pay," said Borrus of the Council of Institutional Investors. "It puts boards on notice that they need to rethink their pay packages and go back to the drafting board."

The proposal faces an uphill battle to become law. The White House came out against it this week, and business opposition remains intense.

But shortly after the House vote, Democratic presidential hopeful Sen. Barack Obama (D-Ill.) introduced a Senate counterpart to the House bill — suggesting that the issue could gain prominence in the presidential race.

"With the average CEO now earning hundreds of times more than their workers do even in failing companies, it's no wonder that middle-class families are frustrated," said Ben LaBolt, a spokesman for Obama.

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jonathan.peterson@latimes.com

http://www.latimes.com/business/la-fi-execpay21apr21,1,5818920.story