Earlier this past week, Royal Dutch Shell announced that it was “freezing executive pay and revamping bonus policy.” This choice came in response to a shareholder rebellion at last year’s shareholder meeting over compensation and bonus levels. Shell’s CEO, Peter Voser, and CFO, Simon Henry, will receive less in salary than their predecessors and their salaries will be frozen from July 2009 until January 2011. The performance based stock option plan, which specifically drew the ire of shareholders in 2009, previously required that the company be in the top three of its peers in shareholder return before shares were awarded, but when Shell ended up fourth amongst its peers last year, executives still awarded themselves the shares despite the plan strictures. The stock option plan has now been altered, by tying compensation to specific goals for the company such as ensuring projects are delivered on time and on budget. Shell says that this plan “demonstrate[s] appropriate restraint in the current economic environment” and “increase[s] alignment between executive and shareholder interests.” Some commentators hail this decision as a victory for those who promote greater shareholder democracy in corporations, as a non-binding shareholder vote here has seemingly provided sufficient pressure to affect officer’s positions on compensation levels.
Still, some evidence exists that suggests when shareholders are primarily institutional investors, there is no incentive to pressure executives when a firm’s compensation plan seems entirely disconnected from a “current economic environment.” The case of Lazard Ltd.’s executive compensation for 2009, seems to indicate that when “shareholder ire” is not a consideration for executive’s awarding themselves compensation, that in an environment when profits are down 95%, that it is still fine to increase executive compensation significantly. Lazard’s 2009 profits were way down, but its executives and employees were compensated at a rate that required payout of more than 72% of total annual revenue, up from 56% of annual revenue being earmarked to compensating employees in 2008.
“I don’t think it’s a coincidence that the short-term profit drive of corporate America happened at the same time that mutual funds became the major owners of these companies,” says Russel Kinnel the director of fund research at Morningstar Inc. If institutional investors are content to quietly watch executives increase compensation remarkably in the face of dreadful performance, can we really expect a “bonus based on performance” system to take root on Wall Street?