Executives across the country are preparing for a spring ritual of corporate democracy: the annual shareholders meeting. Once a year, these highly paid toilers of the executive suite stand before the folks who actually own their companies.
For those who run some of America`s biggest publicly held corporations, this year`s annual meetings will be more trying than usual. Apart from dry numbers about sales and earnings, their own salaries and perks are in the spotlight.
”Just why, sir,” some shareholder might inquire politely of UAL Corp. Chairman Stephen M. Wolf, ”did you collect millions in 1990 and then watch the company lose $332 million last year?”
Just asking.
Not to single out Wolf or UAL. Similar queries could be put to plenty of other chief executive officers in the major leagues of pay, including Time Warner Inc. heads Steven J. Ross and Nicholas J. Nicholas Jr., ITT Corp. Chairman Rand Araskog, Chrysler Corp. Chairman Lee Iacocca and Reebok International Ltd. Chairman Paul B. Fireman.
At 10 annual meetings this year, queries about CEO pay will be put to formal vote. Last week the Securities and Exchange Commission said it will allow shareholders to question executive pay in non-binding votes at IBM Corp., Eastman Kodak Co., Bell Atlantic Corp., Grumman Corp., Chrysler Corp., Baltimore Gas & Electric Co., Aetna Life and Casualty Co., Equimark Corp., Black Hills Corp. and Battle Mountain Gold.
Last week`s surprise SEC decision affects those 10 companies this year and all SEC-regulated companies starting next year.
The SEC previously considered executive pay part of the ordinary business of running the company and therefore out-of-bounds for shareholders. The only way shareholders have been able to vote on this topic has been in regards to
”golden parachute” compensation packages.
But last week, everything changed. The SEC in-bounded the issue and said it also will require companies to disclose clearly in proxy statements how much executies are paid. This will enable shareholders and others for the first time to easily compare often-complicated compensation packages.
The SEC action was seen as an effort to stem current congressional efforts to legislate executive pay.
Even though few shareholder votes on compensation are planned this proxy season, changes already are being made. United Shareholders Association, a Washington-based shareholder activist group, earlier reached accords with ITT and UAL to either modify or increase public disclosure of executive pay policies.
Nor does it mean executive pay won`t come up at other annual meetings.
Both the church groups that traditionally focus on investments in South Africa and other so-called social issues and institutional shareholders that focus on such corporate governance mysteries as proxy rules and takeover defenses promise voices will be raised this spring on the pay issue.
”For us, this isn`t just a governance issue, it`s a fairness issue,”
said Timothy Smith, executive director of the Interfaith Center on Corporate Responsibility. Smith asked why an executive such as Chrysler`s Iacocca should make $4 million a year when ”he`s paying his Mexican maquiladora workers $30 to $40 a week.”
”You will see some institutions voting against boards of directors and publicly saying” it`s because of compensation policies, said James E. Heard, president of Institutional Shareholder Services Inc., a Washington-based adviser to big investors.
Since the institutional shareholders can`t vote directly on the issue, the only way to voice their displeasure is to withhold votes from board members, said Heard.
In a special report on the 1992 proxy season, Shareholder Services stated that compensation ”has become a national issue . . . and is quickly shaping up as the key shareholder issue for 1992.”
Executive compensation has been of growing concern to institutional shareholders, such as big pension funds and insurance companies that collectively own hundreds of billions of dollars of corporate America.
The issue heated up when compensation consultant Graef Crystal and others surveyed pay levels and found many CEOs were taking home more than 100 times what the average working person in America earns and that CEO pay bore no relation to company performance.
The issue boiled over in the wake of President Bush`s ”jobs, jobs, jobs” trip to Asia. He was accompanied on that ill-fated journey by leading executives, including the heads of Detroit`s Big Three automakers. The pay levels of those executives and the dismal performance of General Motors Corp., Ford Motor Co. and Chrysler were compared unfavorably with the pay levels and performance of their Japanese counterparts.
Hewitt Associates, of Lincolnshire, reports the fastest-growing component of executives` total compensation has been long-term incentives. Those incentives such as stock options, which give executives the right to buy stock at a set price within a specified time, have produced many of the recent gargantuan gains in executive pay packages.
These incentives jumped to 36 percent of total compensation last year from 17 percent in 1982.
The growth rate has flattened in 1992 because companies are attempting to limit the awards not specifically ”earned” by the executive through improved financial results. Aware of the concerns of institutional shareholders, companies seem to be trying to limit ”excessive” awards, Hewitt says.
Georgeson & Co., in its recent survey of institutional investors, found they want executive pay tied to performance, independent compensation committees on boards of directors and better disclosure in proxy statements about the compensation of top executives.
”Everyone`s big complaint now is (that) to find out what someone`s paid you have to read 23 pages in the proxy,” said Georgeson Vice President Arthur B. Crozier. ”It`s like a jigsaw puzzle or a detective game.”
To make it easier, the SEC proposes to require companies to value stock options in a uniform manner. And, in a controversial move, the Financial Accounting Standards Board said recently it may require companies to take a charge against earnings for executive stock options in the year they are granted.
Tax-qualified stock option plans are taken out of earnings as part of total compensation but aren`t specifically charged against earnings on the income statement. (Doing so would indicate more clearly to shareholders and other observers the cost of such options.)
Part of the problem on many corporate boards is the directors on the compensation committee are in some way beholden to the executives whose pay they determine. ”I think independence flows more from how you got your board seat in the first place,” said United Shareholders President Ralph Whitworth. Georgeson President John Wilcox believes the spotlight on the issue will help directors deal with it. ”A lot of corporate directors are happy”
changes will be made, he said. ”They were stuck with this continuous ratcheting problem” where their chief executive says, ”Mr. Jones makes $1 million, why shouldn`t I? That escalation had nothing at all to do with real value and performance.”
”This will be seen as meddling by CEOs,” said Smith, of the Interfaith Center on Corporate Responsibility. ”But they need to understand, Iacocca needs to understand that there is a connection between the wages he pays his workers in Mexico and his wages.”
