Shareholders look at executive pay.

• Author: Minow, Nell
• Position: Executive Compensation in the Spotlight

For the shareholder, information about executive compensation presents an investment opportunity. First, a company's compensation plan can guide the shareholder in making buy/sell decisions. As Graef Crystal points out, in "In Search of Excess: The Overcompensation of American Executives," an investor can do well to consider the use of restricted stock grants in a compensation package as evidence of the board of directors' highly informed opinion that the stock is not likely to go up.

Second, shareholder initiatives to better align the interests of management and shareholders can themselves be an investment. A report issued early last year by Wilshire Associates found that the shareholder initiatives sponsored by the California Public Employees Retirement System resulted in a net return of $137 million above the S&P on an investment of about $500,000. And these initiatives did not have to get majority shareholder support to realize the extra value. The simple fact that shareholders visibly focused on these companies was enough to produce the favorable results.

So it's worthwhile for shareholders to focus on executive compensation. Complaints about pay can be made in a soundbite with political, economic and even gossip appeal. And it's easy and inexpensive for them to do so. A shareholder can submit a shareholder proposal about executive compensation for little more than the cost of a stamp. And under the Securities and Exchange Commission's new proxy rules, the shareholder can also distribute information about executive compensation to other shareholders for little more than the cost of a couple of dozen letters or phone calls. With the likelihood that such action will improve returns simply by putting the spotlight on compensation and the fact that there is little or no downside risk, this is an "investment" that shareholders, especially fiduciary shareholders, will find increasingly appealing.

Probably the most frequent misunderstanding about the conflict of interest between shareholders and management with regard to pay is not the amount, but the variability of the pay. Shareholders want pay to vary with performance as much as possible, but managers understandably want as much certainty in their pay as possible. Even those managers who want variability on the upside are less willing to allow it on the downside.

In the last year alone, the issue of executive compensation has been transformed by four factors: the increased sophistication...