Exec Comp: Should Shareholders Hold Say?

The days of Enron and WorldCom-sized corporate malfeasance scandals may seem like they just ended, but another debate regarding corporate ethics is reaching critical mass in boardrooms across the country – the issue of executive compensation. Adding fuel to the fire were the recent lucrative severance packages for Home Depot CEO Bob Nardelli ($210 million) and Pfizer CEO Hank McKinnell (estimated at $198 million). Unions are now finding new ways to voice their rage over executive pay – resolutions seeking a shareholder “say over pay” have been filed at 44 companies with more surely to follow. Richard Ferlauto of the American Federation of State, County and Municipal Employees believes that shareholder votes are a fair and necessary way to democratize the process of executive pay. Stephen Mader of Christian & Timbers, an executive search firm, says a shareholder vote is needless. Both were on “Power Lunch” to debate the issue.

Ferlauto says his organization aims to have shareholders support a proposition that would make a company’s management put its CEO compensation package up for vote at an annual meeting. But Mader says the issue about executive pay and the war for talent that companies face in an increasingly competitive world are far too complex to just be voted up-or-down. Picking CEOs and deciding their pay packages is a strategic issue as far as firms are concerned, and it’s an issue that belongs in the boardroom, Mader says.

The idea of a shareholder “up-or-down” vote is not a newfound concept. Companies in the U.K. have had the requirement for over three years and Australia and several Scandinavian countries also require shareholder votes. Ferlauto says there have never been any problems overseas and shareholders usually end up supporting the pay package anyway, often because they feel the opportunity to vote on it creates a dialogue between shareholders and management that wasn’t previously there. The main point of an advisory vote is to link pay to performance in a strategic way, says Ferlauto. He believes putting the issue up for a vote would focus a company’s management on long-term strategic planning while at the same time aligning shareholder interests.

Mader’s view is that doing so would actually work as an obstacle for a company because it would make CEOs too focused on the company’s stock price and less interested in long-term strategic initiatives.

But there is no formula that links pay with performance. Take Home Depot – in many ways, Bob Nardelli turned the company around from a managerial perspective during his 6-year tenure, yet the stock price never reflected it. The same might be said for McKinnell during his 5 years at the helm of Pfizer. Ferlauto says the point is merely to allow shareholders to make their own definition of performance, not to unilaterally define it for all companies. The procedure of voting on their executive’s compensation would essentially allow a way for shareholders to create their own metrics for performance, Ferlauto says. In the same respect, shareholders could ratify that a CEO is being paid appropriately which could increase investor confidence in the company and its leadership.

While performance is crucial in determining any executive’s salary, it is simply an issue that should remain in the hands of management, who are looking at the long-term benefits, and not shareholders, who tend to think in terms of the short-term stock price, Mader says.

Companies that currently have shareholders who want an advisory vote on executive pay include Morgan Stanley, Bank of New York, Citigroup, Affiliated Computer Services, Wachovia, Qwest Communications and Ingersoll-Rand.