Friday, January 27, 2012

Proxy Season Promises to Challenge Executive Pay

The Wall Street Journal reports that in a year where executive compensation has plateaued, Wall Street firms can still expect challenges from shareholders during the upcoming proxy season. According to the WSJ: "Investors ranging from charitable foundations to large state pension funds are preparing to challenge large financial firms on their pay practices. As a result, this year's 'proxy season'—the period, usually in the spring, when companies hold annual shareholder meetings—promises to be an eventful one in the financial sector, compensation consultants and corporate-governance experts say."

Activist shareholders in recent months have filed proxy proposals asking large Wall Street firms to study the potential negative impact that exorbitant executive compensation policies might have on the firm's reputation and growth potential. Again, according to the WSJ: "In December, the Nathan Cummings Foundation—a private charitable organization and institutional shareholder—filed proposals asking that directors at Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. address potential reputational damage that big pay packages could bring to the banks, said Laura Campos, director of shareholder activities at the foundation. The proposals also request that they study how such awards could reduce banks' ability to spend money on other areas, and report those findings to shareholders."

The upcoming proxy season promises to be an interesting one as recent Dodd-Frank legislation requires firms to hold nonbinding shareholder votes on their executive pay policies (once every three years). Six of the largest Wall Street firms held these votes last year (J.P. Morgan, Wells Fargo, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America), with all six receiving symbolic shareholder approval for their pay packages (as indicated in the chart above, courtesy of the Wall Street Journal). Each expects to hold nonbinding votes again this year.

1 comment:

  1. It will be interesting to see how successful this requirement of Dodd-Frank is in the long-run.

    In one sense, this could be viewed undue government influence and further federalization of the issue. Executives defend large pay packages that seem unreasonable to middle class Americans by arguing that their innovation and experience often merits such compensation.

    On the other hand, giving more power to shareholders (albeit in the form of regular non-binding votes) and recognizing the negative public image caused by such large salaries seems to be a positive step toward sensible regulation.