How to avoid negative votes on pay plans.

• Author: Aisenbrey, Beverly W.
• Position: Chairman's Agenda: Balancing Shareholder Interests

How to Avoid Negative Votes on Pay Plans

In conjunction with their growing influence on many areas of corporate governance, institutional shareholders have become increasingly involved in the issue of officers' compensation in publicly traded companies. This increased interest and involvement in executive compensation issues by institutions has several reasons, including: * The cumulative size of their investments has become so substantial that it is often difficult for them, when they are dissatisfied with company performance, to bail out of those investments without causing a decline in stock price. Thus, more institutions are now using the alternative of trying to influence future performance in the hope of seeing the value of their investments increase. * In many instances, they have seen executive pay levels continue to increase while company performance has declined. * The compensation plans presented to them have become far more flexible in design, creating uncertainty as to how the plans will operate.

The primary avenue for institutional involvement has been their right to vote on executive incentive plans submitted to shareholders. Typically, plans that use company stock are submitted to shareholders for their approval. Shareholder approval is needed to ensure that plan transactions by officers and directors will be exempt from the reach of SEC Section 16(b) short-swing profit recovery. This need has been reaffirmed by the SEC's recent decision to retain the shareholder approval requirement after having proposed to eliminate it. Shareholder approval may also be required by state corporation law or the listing requirements of a stock exchange.

Another means of shareholder involvement opened up in 1990 when the SEC staff concurred that a shareholder proposal for the board of directors to consider prohibiting new, or cancelling old, golden parachute arrangements for company executives was an appropriate issue for shareholders to vote on. Several of these proposals were included in 1990 proxy statements and received significant support. None of these proposals were passed, but it is anticipated that more of them will be submitted in this year's proxy season.

To our knowledge, institutional shareholders generally have not yet attempted to set or limit executive pay. They appear to recognize the responsibility of the board to determine pay levels. However, there clearly is concern about escalating pay levels for executives -...