Last week, in the same interview that produced his cringe-worthy assessment of Wall Street executives as “savvy businessmen,” President Obama responded to outsized bank bonuses by pushing for “say on pay,” which would institutionalize shareholder votes on compensation packages. “I guess the main principle we want to promote is a simple principle of ‘say on pay,’ that shareholders have a chance to actually scrutinize what CEOs are getting paid,” Obama said. “And I think that serves as a restraint and helps align performance with pay.”
Today, Royal Dutch Shell provided some evidence that this approach might work. After the oil giant missed performance targets in 2008, but still saw fit to award performance-based bonuses, the company’s shareholders rejected its compensation plans in what the Wall Street Journal called a “stunning rebuke.” And Shell seems to have gotten the message, as its 2009 compensation plan has some major structural changes, including a bigger emphasis on long-term incentives:
The proposals constitute a significant step toward greater pay restraint at one of the world’s largest companies at a time when excessive awards to executives, particularly at banks, are a political hot potato. The salaries of Shell Chief Executive Peter Voser and Finance Chief Simon Henry will be 20% lower than those paid to their predecessors and will be frozen from July 2009 until January next year, according to proposals outlined in a letter from the chairman of Shell’s remuneration committee, Hans Wijers. However, the maximum shares the CEO could be awarded under the performance-related long-term incentive program would be increased from two times to three times salary.
While the overall pay level may not change, the emphasis is on a longer-term window for determining success, and bonuses can now be clawed back even after they’ve been awarded. The chairman of Shell’s remuneration committee said that the goal was “greater alignment with shareholders’ interests.”
For an example of a company that could use some reining in in terms of compensation, look at Citigroup, which literally paid so much to its employees that it “wiped out every penny of profit.” Other Wall Street banks are paying 80 or 90 cents out of every dollar they earn in employee compensation. “It’s not a fair shake,” said John Hill, chairman of the trustees at Putnam Funds, a mutual fund company. “I think the shareholders who paid for building that franchise should be getting a bigger share of the franchise’s profits.”
Some Wall Street banks, including JP Morgan Chase and Bank of America have voluntarily implemented shareholder votes on compensation. But the wider business community, led by the Chamber of Commerce, opposes mandating the measure, even though, in terms of instituting these sorts of shareholder rights, the U.S. is lagging behind other nations. For instance, Great Britain and Australia both mandate say on pay, and CEO compensation there “grew 2.4 percent and 25.3 percent, respectively, from 2002 through 2006, while pay in the United States soared 59.9 percent in the same period.”
It makes sense that more accountability to shareholders would lead to pay packages that are better aligned with the interests of the company, instead of the interest’s of management’s personal bank accounts. Say on pay won’t solve all of the problems that we are seeing in terms of executive compensation, but it is one small step that, as Shell’s experience reveals, can make a difference.