Homer & Friends on Executive Compensation and Say on Pay – Part 3
This column continues the panel discussion on executive compensation and Say on Pay featuring Homer Simpson, Gordon Gekko and Henry David Thoreau.
Homer:Â Shareholders not care?Â What's all this âSay on Payâ stuff Lisa keeps yammering about?
Gekko:Â I know, I know, it's really annoying isn't it.Â Some of the shareholders have started to get excited about this over the past several years, especially since my pals in the financial sector nearly ran aground and then paid themselves like princes just a year after they needed a government bailout to survive.Â Greed is good, but sometimes you need to lay low and think long term.Â Lloyd Blankfein had the right idea, but it's hard to lay low when your every move is dissected as a ploy in the media.
Thoreau:Â Say on Pay, I like the sound of that, almost democratic.
Gekko:Â Not so much. Led by institutional investors and managers, like Walden Asset Management, and AFSCME (a public employee union pension fund getting involved in exec pay - ouch) a growing number of companies have asked for an advisory shareholder vote on executive compensation.Â This year over 50 companies are carrying a âSay on Payâ item on the ballot voluntarily and another 70 have received shareholder proposals.Â The key word is advisory.Â In theory the advisory opinion should have some effect on the directors, who generally want to be reelected with a high percentage of votes cast.Â In practice, I don't know of any studies with real world results.
Thoreau:Â Walden Asset Management,Â huh, I knew there was something I liked about Say on Pay.
Gekko:Â Then you might really like this one, Henry, although my guys won, at least for this year.Â The AFSCME Pension Plan submitted a substantive compensation proposal to Bank of America, Goldman, JPMorgan Chase and Wells Fargo.Â The proposal called for the shareholders to urge a three year payout period for boni awarded to the 100 most highly compensated employees in the company, with awards to be based on financial metrics in year one andÂ adjustments based on the quality and sustainability of performance against those same financial metrics in years two and three.Â The idea is to shape the employees view of risk by creating a long-term outlook, see ABCs of Financial Reform for a different approach utilizing the same theory.Â The SEC has already ruled that BoA and JPMorgan need not present the proposal to shareholders, as the ordinary business of a for-profit corporation is managed by its directors and compensation for a group as large as one hundred employees isÂ ordinary business on which the directors need not hear from the shareholders.Â The SEC approach does seem to leave open the possibility that a similar compÂ proposalÂ applied to a smaller group of execs might get to the shareholders.Â Note that although this proposal is more substantive than the simple thumbs up or thumbs down of Say on Pay, it is still advisory.Â Absent some unusual provisions in the charter or by-laws, a shareholder proposal for a binding comp plan runs into the basic issue that state law (usually Delaware law matters) leaves the business to the directors.Â If the shareholders of a Delaware corporation aren't happy they should vote the bums out, not take over the day to day business.
Homer:Â Throw the bums out, I like the sound of that.
Thoreau:Â Not as poetic as Say on Pay, but democratic nonetheless.
Gekko:Â I hear ya, guys.Â Thanks to my impatient pals, the entire world of exec comp might be looking at unprecedented levels of shareholder activity for years to come â if this gets bloody enough, watch for a really exciting trend.Â Instead of just dropping bank holding company status to get away from some of the more intensive government regulation, firms like Goldman might actually go private.Â