Executive pay will face investor votes

Coming soon to an auditorium near you: Lots of executives and corporate directors who could be squirming in their seats.

After more than a year of shrinking retirement nest eggs and job security, investors are in a foul mood going into this spring’s shareholder meetings.

At hundreds of those meetings, shareholders will be voting on so-called “say-on-pay” proposals aimed at ratifying or rejecting executives’ often-astronomical compensation packages. Most are on the agenda at the federal government’s insistence as a condition for getting bailout money.

The proposals are “advisory” only, meaning companies’ boards of directors could ignore shareholders’ votes. Also, some corporate governance experts say various shareholder proposals aimed at curbing executive pay have become almost a routine staple at many annual shareholder meetings in recent years, especially when the economy and stock market are faring poorly.

Still, experts said, times could be ripe for something of a shareholder revolution, given the volume of such proposals being voted on in the midst of a deep recession.

More than 400 financial institutions — including Atlanta-based SunTrust — will be required to hold nonbinding shareholder votes this year giving the banks’ executive pay plans a thumbs up or down. The annual ballots — mandated by the federal stimulus package — are a condition for receiving money under the federal government’s Troubled Asset Relief Program.

SunTrust’s shareholders meet in Atlanta on April 28.

Meanwhile, activist shareholders at about 100 other companies have submitted proposals this year asking for a say-on-pay vote on executive compensation at future meetings. Those votes also are nonbinding.

That list includes Coca-Cola, whose shareholders will meet Wednesday in Duluth; and Home Depot’s shareholders, who meet next month in Atlanta.

Whether such shareholder involvement is a good idea depends on who’s talking.

The boards of directors of both Coca-Cola and Home Depot oppose the say-on-pay proposals.

Home Depot shareholders have already rejected similar proposals three times, the company said in its proxy statement. Home Depot said it has “ongoing, direct communication with shareholders through investor conferences, daily telephone calls and letters” that has led to improvements to its executive pay plan.

Former Home Depot CEO Robert Nardelli became the poster child for extreme paychecks a few years ago after taking home $32 million his final year at the company — plus a $210 million severance package.

Kenneth Daly, president of the National Association of Corporate Directors, said top executives should spend more time developing talented managers who could someday run their companies so they don’t have to offer huge pay packages to “corporate rock stars” from outside the company.

Daly said the current say-on-pay proposals will be “awkward” because executives will have worked for months already under their new contracts. Still, he thinks national regulations or legislation requiring such votes is nearly inevitable.

“There’s a whole lot of unhappiness out there,” Daly said.

Large institutional shareholders are divided on the issue.

“We look at it on a case-by-case basis,” said Tom Horkan, who helps oversee the investment of portfolios totaling nearly $43 billion for Georgia’s teacher and state employee retirement plans. Getting more shareholder input may “make sense” at some companies, he said, but it could “cause distraction” or amount to “micro-managing” at others.

“Right now, everybody’s walking on broken glass,” he said. “I think boards of directors are responsible. They’ll do what’s right.”

On the other hand, Elton Shepherd, a former Coca-Cola employee turned activist investor, said he doesn’t see the harm in having a nonbinding vote on executives’ salaries and perks.

“I think it gives shareholders a little better say in the affairs of the company. … I don’t think it would hurt anybody,” Shepherd said. He has submitted a separate shareholder proposal asking that Coca-Cola get shareholder approval before it allows departing executives to take restricted stock with them that hasn’t vested yet.

Company executives and directors “claim they work for shareholders, but when shareholders try to have any input, every single company opposes,” Shepherd said.

Activist investors have been pushing for more input as CEOs’ pay at many companies has soared. Regulators in the United Kingdom, Australia, the Netherlands and a handful of other mostly European nations began requiring such votes several years ago.

On this side of the Atlantic, several companies voluntarily adopted such ballots in the past two years, including Columbus-based insurance company Aflac.

However, the big boost came with the adoption of the federal stimulus package in February. The legislation, enacted amid the scandals over executive pay at Wall Street firms that took taxpayer bailouts, restricted executive compensation at companies receiving taxpayer funds. It also required those companies to allow shareholders to vote on executive pay packages.

Without such votes, “shareholders have very little mechanism to express any opinion on executive compensation” short of voting against directors on the board’s executive compensation committee, said Carol Bowie, head of corporate governance at RiskMetrics Group. “They’re looking for more dialogue.”