The Shareholder Vote on Executive Compensation Act would require that all publicly traded companies allow their shareholders to cast a non-binding advisory vote on executive compensation packages. Shareholders could vote on executive pay every year beginning in 2009. The bill would also enable shareholders to cast a non-binding vote on any new contracts – known as “golden parachutes” – that guarantee benefits to top executives in the event of a corporate takeover or merger.
The Middle-Class Position:
The Middle Class Supports. Today nearly half of Americans own some stock, with many middle-class families relying on 401(k)s and other investments to finance their retirement security or help their children afford college. Workers with traditional pension plans, including many public employees, also have a stake in the long-term financial performance of companies their pensions are invested in. As a result, the retirement security middle-class Americans work a lifetime to earn can be thrown into jeopardy by lavish CEO pay and retirement packages that reward executives with hundreds of millions of dollars even if they perform poorly or behave unethically. Excessive CEO pay not only cuts into the company’s bottom line, but can also provide incentives for CEOs to manipulate earnings or encourage mergers that pump up their compensation packages but are unprofitable for the company as a whole – directly undermining shareholder value.
Simply put: when CEOs get sumptuous rewards for inferior or mediocre work, middle-class Americans get short-changed on the retirement benefits they’ve earned. Yet so far there is little shareholders can do to curb the excesses of companies in which they have a vital stake. This bill would introduce an important element of accountability, giving all shareholders “a say on pay” in the form of a non-binding advisory vote to the Board of Directors. Although the vote is non-binding, knowing they have option to vote increases shareholders’ scrutiny of CEO pay and provides regular shareholder feedback to Boards of Directors. The mechanism of a non-binding vote on compensation has been used successfully in Britain, Australia, and other countries to put the brakes on questionable compensation plans and tie CEO pay more closely to performance. Some U.S. companies, such as the health insurer AFLAC, have also voluntarily adopted a shareholder vote on executive compensation, which they regard as a “best practice” in corporate governance.
From the Experts:
“As an organization representing long term shareholders from around the world, including the US, we believe an advisory vote on executive compensation in the United States will be a great benefit to companies in the long-term, the competitiveness of the U.S. capital markets, and thereby to investors… We have found that boards are better able to exercise independent judgment when they have shareholder support for their proposals for the executive compensation package.” - Mark Anson, Chairman, International Corporate Governance Network
“An annual shareowner advisory vote on executive compensation would efficiently and effectively provide boards with useful information about whether investors view the company’s compensation practices to be in shareowners’ best interests.” – Jeff Mahoney, General Counsel, Council of Institutional Investors (April 5, 2007)
“Internal corporate governance failures [can] lead to the creation of a super-rich class, whose rise is not based on merit, but rather on ineffective corporate boards, crony relationships and financial manipulation. When failed CEOs walk away with hundreds of millions of dollars or when golden handshakes are given to the newest “rock star” executive with contract guarantees or when books are manipulated to meet payout thresholds, then the American ideal of working hard to get ahead rings hollow. This type of inequity may eventually tear at the fabric of our society.” -Richard Ferlauto, Director of Pension and Benefit Policy, American Federation of State, County and Municipal Employees (March 8, 2007)
Beyond this Bill:
Congress could provide shareholders with additional tools to hold corporate boards and management genuinely accountable. For example, shareholders could be given access to a company’s proxy to elect their own nominees to the Board of Directors, ensuring the openness and independence of boards currently dominated by insiders and their hand-picked successors. Another valuable corporate governance reform would require companies to take back compensation that was awarded on the basis of false financial statements, as mandated by last year’s unsuccessful Protection Against Executive Compensation Abuse Act.
Total 2006 profits of California tech company Synnex Corp.: $51.4 million
Approximate ratio of every dollar Synnex earned that went directly into the pocket of CEO Robert Huang, according to the Los Angeles Times’s California Executive Pay Report: 1:7
Amount that Huang’s outsized pay package reduced the value of each company share, according to the Los Angeles Times: $2.90
Proportion of Americans who say CEOs are overpaid: 8 in 10
Average percentage of company profits paid to the top five executives at U.S. companies in 1993: 5
Average percentage paid to the top five executives in 2003: 10
Search our analyses of legislation
significant to America’s current and
aspiring middle class, and find out
how members of Congress voted on
those bills.
