Shareholders look to keep heat on executive pay

This year's proxy season could be a pivotal one in the battle for improved corporate governance. More than 90 companies face resolutions demanding that shareholders be given a "say on pay." That is, shareholders are demanding the right to speak out on the pay packages of top corporate executives. Financial planners and investment advisers have an important role to play in the battle. They can urge clients who own common stocks in companies facing such proposals to make their opinions heard by voting their proxies. Shareholder anger over what many see as excessive executive compensation has been building for years, but the sight of chief executives walking away with millions after presiding over disasters at firms such as Merrill Lynch & Co. Inc. and Citigroup Inc. has infuriated investors. Some activist shareholders believe the only way to rein in booming executive compensation is to give shareholders a veto, or at least a non-binding vote, over pay packages. Even a non-binding negative vote would send a strong message to board-level compensation committees that shareholders do not want to reward senior executives for poor or even mediocre performance. It also would warn compensation committees to be more careful in designing executive-pay packages. Of course, most corporate boards oppose the say-on-pay proposals, claiming that giving shareholders even an implicit veto would tie their hands in hiring and retaining the best possible senior executives. Opponents argue that say on pay is just the beginning of institutional-shareholder intrusion on management's prerogatives. They fear that once investors have a voice in compensation, funds run by public employee and union pension funds will seek additional board power. Other opponents argue that -companies already have changed the way they compensate top -executives. But shareholders are skeptical — and have a right to be. In 1980, average CEO compensation was 42 times the pay of the average worker. In 2006, it was an eye-popping 364 times average worker pay. That is obviously hard to justify, especially given the anemic performance of stocks over the past decade. Giving shareholders a say on pay, besides getting the attention of compensation committees and chief executives, also might encourage shareholders to become more engaged with the companies whose stocks they own. Advisers should warn shareholders that if they don't make their voices heard, the only voices board members may hear are those of chief executives demanding ever-bigger pay packages. Guess who pays for those packages?