Shareholders get voice on executive pay

Brian Jones, a longtime shareholder of McCormick & Co., wasn't very happy about the multimillion-dollar pay pocketed last year by executives at the Sparks-based spice maker. So he let them know on the company's proxy statement.

He's part of a new wave of shareholders, fueled by anger over CEO riches, government bailouts and the financial crisis, who can now weigh in on executive pay.


"In my opinion, the top executives make too much," Jones, 65, said of corporate America's compensation practices as he waited for McCormick's annual shareholder meeting in Cockeysville to begin last month.

He and like-minded stock owners didn't prevail. McCormick shareholders overwhelmingly approved the company's executive compensation. But not every company's management is getting off so lightly.


Starting this year, thanks to the Dodd-Frank financial reform act, shareholders in Maryland and across the country are getting an official say on what executives are paid at most U.S. publicly traded companies.

Executive compensation is climbing back up even as unemployment remains high at 8.8 percent. Early data indicate that CEOs at large corporations received double-digit percentage pay increases last year.

These "say on pay" votes — yes or no — are advisory in nature, but shareholders can send a strong signal to top management and board members. While corporate boards are not bound by the votes, the ballots are designed to give shareholders a greater voice.

Separately, shareholders also now have a nonbinding say on how often they want to vote on pay: every year, two years or three years.

Corporate governance experts caution that companies ignoring compensation concerns run the risk of alienating investors and creating more strife.

"I think there's certainly strong incentive for companies to be responsive to any dissatisfaction that is expressed through the votes," said Carol Bowie, head of compensation policy development at Institutional Shareholder Services, a proxy advisory firm. "If they're not, at some point, that opposition would spill into the director election or compensation [committee] member election."

So far, most companies are winning support for their executive pay practices, with shareholders giving on average about 90 percent approval, according to data compiled by Institutional Shareholder Services.

But shareholders are wielding their new power by rejecting executive pay at some large companies, including Hewlett-Packard, homebuilder Beazer Homes and Jacobs Engineering Group. Hewlett-Packard and Beazer, for instance, said they would carefully consider the results.


Along with influential proxy advisory firms, several large institutional investors, such as the California Public Employees' Retirement System, have called on companies to support annual votes on pay, which they argue provide better accountability and transparency.

In the past, shareholder activists were able to pressure some companies into including say-on-pay votes on proxy ballots. But it wasn't until after the financial disasters of 2008 that Congress made them required under law. The recession reignited calls to put a stronger check on corporate largesse, especially in light of government bailouts of Wall Street firms, banks and other industries.

"This is a byproduct of the financial crisis," Brian Rogers, chairman of Baltimore's T. Rowe Price Group and a veteran mutual fund manager, said of the say-on-pay movement. "People don't object to executives making a lot of money if the company does well, but the problem is the disconnect that irritates investors, appropriately so."

Some executive compensation experts are not optimistic about whether say-on-pay votes will have any teeth.

"Ultimately, if you're upset with the pay, you're really upset with the people who negotiated the pay," said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, referring to board members on compensation committees. "Your response should be to replace them. Your beef is with compensation board members."

"I think a lot of this is much ado about not much," he said of say-on-pay votes.


Local businesses

Among companies in the Baltimore region, Price, apparel maker Under Armour and Constellation Energy Group have recommended votes on executive compensation every year, while McCormick shareholders supported the company's push for a triennial vote. Asset manager Legg Mason Inc., whose fiscal year ended March 31, has yet to file its proxy, which includes details on executive compensation.

At its annual meeting last week at its Owings Mills campus, a majority of Price shareholders voted in favor of the firm's executive pay packages. And shareholders also overwhelmingly supported the board's recommendation to vote on pay annually.

"The board puts a lot of effort into thinking about our compensation philosophy, the levels and how we are positioned relative to each other internally and relative to the outside world," said Price CEO James A.C. Kennedy, whose compensation rose last year nearly 51 percent to $7.1 million when the company posted record assets under management, net revenue and profit.

Other Price executives also saw pay increases last year, including Rogers, whose compensation totaled $6.9 million last year.

"It's a compliment to us that shareholders have faith in our board and our internal process," Kennedy added.


When displeased

Of course, investors can dump their stocks altogether to oppose excessive pay packages, said Easton resident C. William Jones, president of the Association of BellTel Retirees, representing former workers of telecommunications giant Verizon. The 112,000-member association has pushed for corporate governance and compensation changes at Verizon, including sponsoring a say-on-pay proposal in 2007. That proposal passed and the company adopted a policy to give shareholders a voice in executive pay starting in 2009.

Across corporate America, there is now a "way the average shareholder can let them know about their displeasures," said Jones, whose group is opposing Verizon's 2010 executive pay. "There are a lot of shareholders out there, and they're not all big guys."

But only one in 20 individual retail shareholders exercises their right by voting on proxy proposals, according to Broadridge Financial Solutions, a shareholder communications company.

Chuck Callan, Broadridge's vice president of regulatory affairs, said he has not seen an increase in voting participation among retail shareholders at companies that have had say-on-pay proposals in the past.

And not all investors believe they have the expertise to judge executive pay.


James Kahler, 75, a Price shareholder from Baltimore, said he paid more attention to the re-election of directors, who have his confidence to make the right decisions about issues like executive pay.

"The average stockholder wouldn't have a clue on what's proper" when it comes to evaluating executive pay, said Kahler, who voted in favor of Price's pay packages.

Bob McCormick, chief policy officer at proxy advisory firm Glass Lewis & Co., said say on pay is designed to foster dialogue between shareholders and boards.

The fact that a small number of companies have lost support for their executive pay indicates that shareholders are taking the measure seriously, he said.

"People are looking at each individual program and targeting the outliers or companies where there's a history of poor linkage between pay and performance," McCormick said.

Added spice


At its stockholder meeting in March, spice maker McCormick's CEO and chairman Alan D. Wilson pointed out the company's 5 percent increase in sales in 2010 and $54 million in cost-cutting savings to nearly 1,000 shareholders at a packed ballroom at a Cockeysville banquet hall.

About 98 percent of McCormick shareholders supported pay increases for the company's top managers. Wilson's compensation, for instance, rose 22 percent to $6.3 million last year.

McCormick spokesman Jim Lynn said the company is "gratified by our consistent and strong support from our shareholders."

Many companies were pushing for three-year votes on pay earlier this year, but the tide has been turning in recent months, corporate governance experts say.

Given strong shareholder support for annual votes, some corporate boards "saw the writing on the wall," said Bowie of Institutional Shareholder Services.

At least one Baltimore-area company has already responded to shareholders' say-on-pay concerns. Ciena Corp., a Linthicum-based maker of telecommunications networking equipment, proposed a triennial vote on its executive pay plans, arguing that the three-year time frame better aligns with the company's practice of rewarding long-term performance.


But shareholders thought otherwise, favoring an annual vote by a 2-1 margin. Ciena stockholders, however, voted in favor of the company's executive pay packages.

Responding to its shareholders' sentiment, Ciena said in regulatory filings that it would hold its next say-on-pay vote next year.

A sample of "Say on pay" frequency vote recommendations among Maryland companies

One year:

T. Rowe Price (shareholder approved)


Constellation Energy Group

Under Armour Inc.

Sandy Spring Bancorp

Three years:

McCormick & Co. (shareholder approved)

Ciena Corp. (shareholder approved annual vote)


Sourcefire Inc.

Source: Securities and Exchange Commission filings