Nay on Pay: Comments Sought on Draft Guidelines

The United States Proxy Exchange (USPX) released draft guidelines for shareowners to use in making say-on-pay voting decisions. Comment letters are due by June 2nd to contact@proxyexchange.org. Please put “Say-on-Pay Guidelines” in the e-mail subject line. Letters will be posted to the USPX website, unless you indicate you would rather remain anonymous. (Disclosure: I am a member of USPX. Anyone can join for a nominal cost.)

Our draft guidelines lay out the problem of rising CEO pay, largely unrelated to performance. Shareowners now have a “say-on-pay.” However, if we mindlessly vote in favor of executive pay packages we will be adding to the problem, providing “insulation” for compensation committees and CEOs who can then point to shareowner approval.

Indeed, at a webinar earlier this week, Equilar indicated that 77.4% of votes at S&P 500 companies have so far resulted in 90% shareholder support for pay packages. A recent post by Dominic Jones, of IR Web Report, shows that most Investors spend just 5 minutes on annual reports and proxy materials.

To help shareowners make the best use of that five minutes we propose two general tests:

1. The ratio test:  Vote down all pay proposals where companies paid their CEO more than whatever pay ratio to average pay you think is outrageous. Peter Drucker warned it should be no more than 20. You may willing to pay up to 50, 100, 150 or more. We show you how. (For an interesting series of posts on the effort to kill the Dodd-Frank requirement to report company ratios, see Jay Brown’s series on Executive Compensation and Ratio Disclosure.)
2. Median executive compensation:  Vote against compensation packages of any firm at which executive compensation exceeds median pay (or some variation of that) in the previous year. Almost every year, median CEO pay rises because no board wants to think of their CEO as average. Paying above average of surveyed peers results in an average that continually ratchets up. Some of us think it is time for CEO pay to ratchet down for a while.

We also recommend that when you vote down a pay package, you also vote against the compensation committee that recommended its approval by the board. At a recent meeting of the Silicon Valley chapter of the National Association of Corporate Directors, Abe Friedman, former global head of corporate governance and responsible investing at BlackRock and Barclays Global Investors, concluded that voting out five compensation committee chairs and putting their pictures in the Wall Street Journal would do more for the pay issue than say on pay rights granted by Dodd Frank.

Again, comment letters are due by June 2nd to contact@proxyexchange.org Please put “Say-on-Pay Guidelines” in the e-mail subject line. Letters will be posted to the USPX website, unless you indicate you would rather remain anonymous.