Investors flexing muscles over executive pay

Lawmakers handed them a sharp implement two years ago — a law that required publicly-traded companies to hold so-called “say on pay” votes at annual shareholder meetings starting in 2011.

The votes are non-binding, but experts say they’re having a profound effect in corporate boardrooms. They’re stirring greater shareholder activism and goading companies to re-tool pay packages. Some firms that lost votes have cut corporate chiefs’ pay or even jettisoned executives.

“It is a day and night” difference, said Patrick McGurn, special counsel for Institutional Shareholder Services, an influential consulting firm that advises pension funds and other big investors on say on pay votes and other issues at shareholder meetings. “(Corporate) directors are engaging with investors like they never did before,” said McGurn.

CEO pay at Georgia’s biggest companies has been affected, according to an Atlanta Journal-Constitution examination of recent pay disclosures by the 31 largest publicly traded corporations in the state. The AJC has been looking into executive pay trends because the 2008 financial crisis and Congress’ enactment of the say-on-pay law have focused greater attention on the issue.

According to the AJC’s analysis of the Georgia companies’ disclosures:

— Median CEO pay rose 3.8 percent last year, to $9.5 million — much lower than the 16.3 percent pay raise the typical Georgia CEO got the previous year — despite comparable financial and stock performance in both years.

— Among Georgia’s largest public companies — its 14 Fortune 500 firms such as Coca-Cola, UPS and Home Depot — typical CEO pay rose only 2.9 percent last year, to $11.6 million. Their pay jumped 23.7 percent in 2011.

— Overall, the 31 Fortune 1000 companies paid their CEOs a total of $274 million in 2012 — 1.2 percent more than in 2011, but well below the previous year’s 14.6 percent increase.

Of course, such numbers also underline the fact that Georgia’s CEOs remain very well paid. A 2.9 percent raise on $11 million, for instance, is $319,000, far exceeding most folks’ annual paychecks.

Pay rose much faster for the CEOs at the 17 smaller Georgia public companies on the list. The typical CEO’s pay in this group rose 9.3 percent, to $4.6 million. The typical raise was 8.6 percent in 2011.

But most Georgia CEOs either did much better or far worse than the broad statistics suggest. About half got pay raises or pay cuts greater than 20 percent.

Michael Casey, CEO of Atlanta clothing maker Carters Inc., got a 63 percent raise last year, to $9.8 million, while the firm’s profits and stock price rose roughly 40 percent. James Bolch, CEO of Milton-based battery maker Exide Technologies, took a 76 percent pay cut, to $2.8 million, as the company’s profits and stock price plunged.

That’s a sign, experts say, that many firms’ boards of directors are working harder to make sure top executives’ compensation is closely tied to company profits and stock returns — known as “pay for performance.”

“As you put more pay for performance in the system, it will result in more variability” because pay is tied to how each company does that year, said Joe Mallin, managing director in Atlanta for executive compensation consultant Pearl Meyer & Partners. “That’s what everyone wants.”

Until the last few years, however, that’s generally not what happened, according to critics.

CEO pay had been soaring for decades at most firms. That’s partly because they have lots of levers to pull to justify big raises, critics said. They can set easy financial targets, manipulate company peer groups used to benchmark pay levels, or buy back company stock to boost earnings per share, a common yardstick of executives’ performance.

However, after the near-meltdown on Wall Street in 2008 and several corporate scandals, Congress enacted the Dodd-Frank financial reform act, which requires companies to allow shareholders to approve or disapprove top executives’ pay packages at least every three years. Most companies hold annual votes.

The votes are non-binding, but companies do have to report the vote results and later explain what they did about it.

Only 34 firms failed in 2011 and 60 failed last year, including Gentiva Health Services, an Atlanta provider of home health and hospice services. So far this year, only about 10 percent of the nation’s thousands of public companies have held votes, and over 90 percent of those have passed.

At companies that fail or get a low approval rating below about 75 percent, boards of directors often re-tool top executives’ pay plans and some cut future pay or raises, experts said.

Shareholders are “sending a clear message of disapproval to larger compensation packages,” said Seattle University researcher Marinika Kimbro and Danielle Xu, at Spokane’s Gonzaga University, in a study released last month.

After analyzing say on pay voting results at more than 2,000 companies in 2011 and 2012, the researchers concluded that shareholders reacted negatively if CEOs had “abnormal” or “excessive” pay compared to the firm’s financial performance and stock returns. The firms’ boards of directors reacted to failed votes or weak shareholder approval by adding tougher performance targets and cutting CEOs’ raises the following year, they found.

Even at the majority of companies that have passed with flying colors, the say-on-pay votes have turned the tables on how companies deal with shareholders, experts said.

“I think the thing that people don’t appreciate yet is that it has totally changed the dialogue between shareholders and management,” said Randall Thomas, a Vanderbilt law school professor who co-authored an earlier study of the say-on-pay rule. “It will have an impact on companies whose pay practices deviate significantly from the norm.”

Part of what’s feeding this running skirmish between companies and their shareholders is the growing role of proxy review consultants like Institutional Shareholder Services and Glass Lewis. The firms analyze public companies’ pay plans and advise pension plans and other institutional investors ahead of firms’ annual shareholder meetings.

This year, ISS advised shareholders to vote “no” on Coca-Cola CEO Muhtar Kent’s $30.5 million pay package for 2012 “due to a pay-for-performance disconnect driven by high overall pay levels during a period of mediocre performance relative to market, sector and peers.”

Kent had gotten a 5 percent raise, similar to Coca-Cola’s profit growth last year, but his pay was more than double that of the typical CEO in the company’s peer group. Meanwhile, Coke’s stock return was less than half the S&P 500’s 16 percent gain last year.

Last month, Coca-Cola responded ahead of its annual shareholder meeting by announcing that if its stock return is below-average this year, it will cap executives’ bonus awards.

At last month’s meeting, Coca-Cola shareholders approved the pay plan, but at a much lower margin — 77 percent of votes compared to last year’s 90-plus percent approval.

Ahead of its annual shareholder meeting, Gentiva Health Services was once again battling the proxy advisory firms’ criticism, after losing its say-on-pay vote last year with only 36 percent support.

Gentiva had suffered heavy losses in 2011 and its stock plunged 75 percent. Gentiva CEO Tony Strange took a 23 percent pay cut in 2011, to $4 million, and a 43 percent pay cut last year, to $2.7 million.

But Gentiva’s losses have continued this year, and the proxy advisory firms once again criticized the company’s executive pay. They advised shareholders not only to vote “no” on say on pay, but also to oust the three directors on the firm’s compensation committee.