Say On Pay: How To Do Something About Executive Compensation


Like the cherry blossoms blooming in Washington D.C., there's another rite of spring—the shareholder proxies that are in the mail. Nearly everyone is outraged that the companies whose missteps were most responsible for the current financial and economic crisis are somehow still able to reward their executives with bonuses and other perks that seem lavish to the average American. In many cases the outrage is compounded by a sense of impotence: besides venting, what can be done about it? Well, there is something that can be done.

Very few companies ask for input on executive compensation, preferring to handle these matters strictly between the executive suite and the boardroom. It took a major financial crisis to throw open a window for shareholder input—one that was already cracked by previous shareholder action. Companies that receive assistance from the Troubled Asset Relief Program (TARP) are required to submit to their shareholders a nonbinding, management-sponsored resolution to approve executive compensation. In addition, some of those companies have also received shareholder proposals requesting that the company obtain shareholder input on their compensation plans, or that they defer option vesting until after the TARP funds have been repaid. So, this presents an interesting opportunity for investors to weigh in on one of the most troubling aspects of the financial crisis: the outlandish bonuses and other compensation being paid to executives even after their firms implode. While public perception has been colored by the AIG and Merrill Lynch bonuses, some companies have actually taken steps to reduce executive compensation in light of last year's poor performance. For that reason, it's probably not appropriate to simply vote against every single management resolution seeking shareholder approval of executive compensation plans. There is, however, one very simple thing you can do:

Vote FOR shareholder-sponsored resolutions that request that a company provide for annual shareholder votes on executive compensation, or so-called Say on Pay resolutions. Pax World generally votes in favor of shareholder proposals regarding Say on Pay.

Votes on companies' actual compensation plans will need individual attention, as they always have. How to tell the difference? Proxies distinguish between shareholder proposals sponsored by management and those sponsored by a shareholder—and management usually opposes the shareholder-sponsored proposals.

Companies receiving TARP money must include in their proxies management-sponsored proposals seeking approval of compensation plans for named executives. However, the Securities and Exchange Commission has not allowed companies that are required to seek shareholder votes on their executive compensation plans to omit from their proxies shareholder-sponsored Say on Pay resolutions, even if they are also required to submit compensation to a shareholder vote under the provisions of the TARP. A few companies that have received TARP funds have both management resolutions requesting approval of executive compensation plans, and shareholder resolutions requesting that shareholders be given the ability to approve executive compensation as a matter of policy.
A simple, one-size recommendation on every company's executive compensation plan is not prudent. But it is always preferable for companies to have policies to seek shareholder input on key items—and for companies that have received TARP assistance from taxpayers (many of whom are facing difficult economic circumstances themselves) it is generally appropriate to vote for every shareholder-sponsored "Say on Pay" resolution in 2009.

Executive compensation is deeply flawed and usually excessive in the United States, not just for companies currently receiving government-provided assistance. Companies that have not received any TARP money should still submit their plans for executive compensation for shareholder approval, and very few currently do. Below is a list of companies whose shareholder meetings are upcoming in 2009 and whose proxies contain shareholder-sponsored Say on Pay resolutions. A few of these companies have also received funds from the TARP. Some resolutions may have been withdrawn or some companies may have received a no-action letter from the Securities and Exchange Commission permitting them to omit these resolutions from proxy ballots, but many will be there. In order to truly fix the broken system of executive compensation in America, the Say on Pay movement will need widespread shareholder support. We urge all investors to consider voting in favor of all shareholder-sponsored Say on Pay resolutions in 2009.

Note: Companies listed in boldface have received bailout money from the U.S. government, and have shareholder meetings that are still forthcoming.

*As of March 31, 2009, Merck was 1.8% of Pax World International Fund; International Business Machines was 3.4% of Pax World Growth Fund and 1.4% of Pax World Women's Equity Fund; EMC was 2.2% of Pax World Balanced Fund and 2.6% of Pax World Women's Equity Fund; CVS was 3.0% of Pax World Balanced Fund and 1.7% of Pax World Growth Fund; Pepsico was 3.0% of Pax World Balanced Fund, 2.0% of Pax World Growth Fund and 2.0% of Pax World Women's Equity Fund; Qwest was 1.7% of Pax World High Yield Bond Fund; ConocoPhillips was 0.8% of Pax World Balanced Fund and 2.6% of Pax World Women's Equity Fund; XTO Energy was 1.9% of Pax World Balanced Fund; Target was 0.5% of Pax World Balanced Fun and 1.9% of Pax World Women's Equity Fund; UnitedHealth was 0.6% of Pax World Women's Equity Fund; Cintas was 3.7% of Pax World Balanced Fund; and Procter & Gamble was 2.9% of Pax World Balanced Fund, 0.8% of Pax World Growth Fund and 2.4% of Pax World Women's Equity Fund. All other securities mentioned in the above chart are not held by any Pax World Fund. Holdings are subject to change.