Financial advisers who vote proxies for their clients should pay close attention to the message sent recently by shareholders of Citigroup Inc. when they rejected a board-approved $15 million compensation package for Vikram S.
Pandit, the company's chief executive.
Clearly, Citigroup's owners — mainly those of the institutional variety — are at long last rebelling against supersized paychecks for executives who turn in dismal or mediocre performances. The Citigroup vote also shows that stockholders are fed up with pay packages that provide little incentive to focus on long-term performance — and impose few penalties if chief executives fail to deliver.
Because advisers who vote proxies are required to do so in their clients' best interests, it is their responsibility to make sure that the companies to which they direct their clients' hard-earned savings don't have pay policies that encourage overly generous compensation for the chief executive or an elite group of senior executives.
If shareholders' faith in Wall Street — and ultimately in the financial markets — is ever to be restored, public companies must stop lavishing their top executives with compensation that bears no relationship to performance.
There also is the issue of compensation for chief executives relative to that of other employees. The average pay package of a chief executive of an S&P 500 company grew 14% to $12.9 million last year, according to a report released a few weeks ago by the AFL-CIO, a federation of 56 trade unions representing more than 12 million workers.
To put that into perspective, for every $1 that the average U.S. worker earned last year, the average S&P 500 chief executive earned $380, according to the AFL-CIO.
TAKING A STAND
Although CEO pay increases were sizable last year, they paled in comparison with 2010, when compensation at the top of S&P 500 corp- orations climbed a staggering 22.8%.
No wonder shareholders are paying closer attention.
Just days after 55% of Citigroup's shareholders cast a nonbinding vote against Mr. Pandit's pay package, the managers of the Sequoia Fund said that they vote their Goldman Sachs proxies to oppose the re-election of veteran Goldman board member James A. Johnson, who had signed off on the compensation of many that company's top executives.
Goldman recently said that its chief executive, Lloyd C. Blankfein, earned more than $12 million in 2011, despite a 30% drop in profits for the year and a 46% drop in the value of the firm's shares. His 2011 compensation represented a 35% drop from the $18.6 million that he earned in 2010, a year in which Goldman's earnings dropped 38% and the value of its stock was practically flat.
Given what little bang for the buck investors got from Mr. Blankfein in 2010, it is no wonder that 27% of the shareholders voted to reject the firm's compensation plan at its 2011 annual meeting.
During the inaugural year of say-on-pay, shareholders voted down proposals at 41 companies in the Russell 3000 Index, according to Institutional Shareholder Services Inc.
So far this year, five companies, including Citigroup, have seen their executive pay packages voted down by shareholders, according to ISS.
As the directors at Citigroup know all too well, say-on-pay has given voice to shareholder discontent — if not outright anger — with out-of-control executive pay practices that seem untethered to economic reality. With unemployment hovering above 8% and many investors still struggling to recover from the 2008-09 market collapse, executive compensation will remain a contentious corporate-governance issue if it isn't reined in.
Advisers should educate their share-owning clients about the proxy vote and urge them to use it. Proxies are as important as dividends, and advisers certainly wouldn't allow clients to throw away a dividend check.
By voting the proxies that they control and educating clients on the proxies that they don't, advisers can play an important role in helping to make sure that pay packages at public companies are rational, transparent and tied to long-term performance.
