Investors get say on CEO pay

Related topics: stocks, earnings, General Electric, Hewlett-Packard, Michael Brush

Over the last decade I've written at least a dozen stories, and read dozens more, about the huge packages of pay, stock options, bonuses and perks handed to CEOs. Those stories make companies nervous -- because shareholders have been mad about such largess for a long time.

The good news now is that shareholders don't have to just take it anymore.

Last year, lawmakers agreed to force most companies to give shareholders a chance to vote on executive pay plans -- a right known as "say on pay." And this year, as we roll through annual meeting season, shareholders have had a lot to say.

As of late last week, shareholders had voted down pay packages at no fewer than 11 companies -- an impressive number since it requires 'no' votes representing more than half of outstanding shares, including those held by CEOs and other insiders.

You probably know at least some of those names: Shuffle Master (SHFL, news), Hewlett-Packard (HPQ, news), Jacobs Engineering Group (JEC, news), Beazer Homes (BZH, news), Stanley Black & Decker (SWK, news), Navigant Consulting (NCI, news), Umpqua (UMPQ, news), Ameron International (AMN, news), Hemispherx Biopharma (HEB, news), Cogent Communications (CCOI, news) and Janus Capital Group (JNS, news).

"Those votes are pretty meaningful. It's hard to get 50% of shareholders moving on anything," says Donna Anderson, who manages global corporate governance analysis at T. Rowe Price Group.

Feeling the heat

Just as critical in assessing the impact of "say on pay" at this point may be the apparent concessions that companies as big as General Electric (GE, news) and Walt Disney (DIS, news) have made to avoid "no" votes. Pay watchdogs say they've seen companies back off such pay practices as:

• Giving execs large option grants with no ties to performance.
• Promising to foot large tax bills on "golden parachute" severance payments.
• Handing out super-sized pay packages.

"The fear was that companies would not take 'say on pay' seriously," says Patrick McGurn, an executive director at ISS Proxy Advisory Services, which advises big institutional investors like pension funds how to vote on "say on pay." "But boards don't want to see high negative votes, and they are taking the process very seriously. A lot of companies are making changes to their compensation structure after talking to investors."

Consider these examples:

1. Making execs work harder for stock options

For years, General Electric gave CEO Jeffrey Immelt stock grants linked to performance goals. Then, earlier this year, it announced that it had shifted gears in March 2010, giving Immelt a grant of 2 million stock options with no such targets. It was "clearly a backwards policy step," says Paul Hodgson of GovernanceMetrics International, a governance research firm. (Check out Hodgson's say-on-pay blog posts here.)

Investors howled. Last week, after several talks with shareowners and with a "say on pay" vote looming, GE backed off. It linked Immelt's stock options to performance targets. Now, for Immelt to get those options, GE must hit a four-year cash-flow target of $55 billion, and GE stock has to do better than the Standard & Poor's 500 Index ($INX) over the next four years.

"That's a pretty significant change," says Hodgson. "Once companies have made an options award, they very rarely go back in and make it harder to get."

Can shareholders claim credit for the change? Listen to GE: "We adopted this change . . . because we are committed to responsible compensation practices that are responsive to shareowner concerns and consistent with prior equity awards."

Lockheed Martin (LMT, news) made a similar change last week when its board added performance metrics to a 2011 grant of 287,000 stock options to CEO Robert Stevens. Now, half the options are tied to Lockheed producing $4 billion in operating cash flow this year. The other half is linked to Lockheed producing at least a 15% return on invested capital, a measure of profits based on the amount of money shareholders and lenders have put into the company.

As with GE, the key here is that Lockheed made the changes after it revealed the grant earlier this year, but ahead of the "say on pay" vote. In the interim, both companies heard concerns from shareholders about how options weren't linked to performance, and they responded.

2. Less lift in golden parachutes

Last March, watchdogs saw a concession here from Disney. Days before its shareholder meeting on March 23, it dropped agreements to pay the taxes on so-called golden parachutes, the payouts that CEO Robert Iger and three other execs would get if they lost their jobs in a takeover.

"That's a pretty big deal," says Hodgson. "Companies don't often go in and modify existing contracts." The change will cost these execs millions, if they indeed deploy those parachutes one day.

3. Reining in mega-pay

And last fall, in response to a "no" vote on its executive comp package in May 2010, Occidental Petroleum (OXY, news) performed a major overhaul on its executive pay plans. It put caps on executive comp that should rein in pay considerably, and the company took bigger steps to link pay to performance.

Though this "say on pay" vote was not imposed by law -- disgruntled shareholders got it on the ballot without lawmakers' help -- it's a great example of how "say on pay" can rein in excessive compensation. Occidental Petroleum CEO Ray Irani has been a target of pay critics for extremely high annual pay. His compensation exceeded $75 million in 2009, more than CEOs at much bigger energy companies, including Exxon Mobil (XOM, news), received.