STAMFORD, Conn. – State Treasurer Denise Nappier, who oversees $21 billion in pension investments, delivered what she admitted might be an unpopular message to a business group meeting on Connecticut’s Gold Coast.
Some corporate executives’ pay is out of control, she said.
“And I say that with an understanding there may be a handful of highly compensated managers staring back at me right now,” Nappier said last week, sparking faint laughter.
Treasurers and other institutional investors – whose substantial holdings wield clout with America’s top corporations – say momentum is building to enact reforms next spring during companies’ annual meetings.
“I think this is going to be the breakout year,” said Patrick McGurn, executive vice president of Institutional Shareholder Services in Rockville, Md. “I think there is almost going to be a single-minded focus by many institutions on fixing executive pay.”
CEO pay growth doubled last year, with a median increase of 30 percent compared with 15 percent the year before, The Corporate Library, an independent investment ratings agency and research firm, reported last month. Median total compensation at the largest companies is nearly $6 million, according to the Portland, Maine-based watchdog group, which analyzed the pay of more than 1,500 CEOs.
Shareholder advocates seeking reforms have cited companies such as Merck & Co., which awarded then-CEO Raymond Gilmartin a $1.38 million bonus after it was forced to withdraw its Vioxx pain relief medication, sending earnings tumbling. Gilmartin also made $34.8 million from exercising stock options and received a new grant of 250,000 options.
Reform efforts are expected to focus on better disclosure of pay, crackdowns on retirement perks, limits to severance payouts and stronger links between pay and performance. Experts predict more votes against corporate board members who approve large pay packages without performance goals.
“I think we’re going to see a record number of resolutions on the topic,” McGurn said. “You’re going to see unprecedented levels of support for them.”
McGurn’s organization tracked 144 shareholder proposals related to executive pay during annual meetings this year. Nearly 30 of the advisory measures passed, mostly related to severance packages and expensing stock options, he said.
Shareholder resolutions trying to cap executive pay have failed, McGurn said.
After a wave of recent corporate scandals reduced the value of state pension and individual investor funds, state treasurers such as Nappier became increasingly active in sponsoring shareholder resolutions to change how corporations operate.
Executive pay has long been a source of contention, but shareholder resolutions have not been as effective in dealing with the issue compared with other reforms such as establishing independent directors to serve on corporate boards, experts say.
But as studies by watchdog groups show CEO pay is rising fast again, some advocates say new resolutions have better prospects.
“I think the excesses have just gotten to the point opposition has reached critical mass,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “I think there are going to be a lot of challenges to it.”
Poor pay policies can lead to fraud, earnings restatements and other issues that hurt shareholder value, McGurn said.
“I think there are some abuses,” said B. Kenneth West, chairman of the National Association of Corporate Directors. “I don’t think there is an endemic problem.”
Some corporate boards such as General Electric Co. have already changed the way they award compensation, trying to more closely tie CEO pay to performance.
Nappier is focused on about six companies, but would not identify them yet. Her office said discussions will be held before she decides whether to file shareholder resolutions.
Nappier said she will urge companies to clearly disclose their executive compensation in one place on the proxy statement.
“As investors, we should not have to engage in a scavenger hunt,” Nappier said.
Comments are no longer available on this story