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Say-on-Pay Doesn't Play on Wall Street

Blunders and bad luck have cost shareholders of seven large Wall Street companies about $364 billion in stock-market value since their share prices peaked in 2006 and 2007. But you wouldn't know it from the halfhearted response to proposals giving investors a direct say on executive pay.

At Citigroup Inc., J.P. Morgan Chase & Co., Merrill Lynch & Co. and Morgan Stanley, proposals that would let investors weigh in every year with a nonbinding vote on compensation got an average of just 37% of shareholder votes, according to the latest tallies. Similar proposals in last year's proxy statements for the same companies got 43% support.

In contrast, shareholder backing of nonbinding say-on-pay proposals at U.S. companies overall so far this year is roughly even with last year, according to RiskMetrics Group Inc., which advises institutional investors.

"The momentum for say-on-pay at financial companies has definitely stalled," says Carol Bowie, head of ISS Governance Institute, a Rockville, Md., unit of RiskMetrics.

Explanations for the laissez-faire attitude toward executive compensation on Wall Street run from investor fixation on the blowups that have destroyed 44% of the seven companies' total market value to reluctance to meddle with how pay and perks are doled out on Wall Street. Despite the staggering losses, some shareholders worry that major pay changes could cause top producers to defect.

Timothy Smith, a senior vice president at Walden Asset Management in Boston who advised shareholders behind a say-on-pay proposal at Goldman Sachs Group Inc. that got 46% of the vote, says the drop in support at companies that had similar measures on last year's proxy is "curious."

But since 2008 is only the second year in which such proposals have been voted on by shareholders at dozens of large companies, it is premature to call the results at any particular company a trend, he says.

"The voting levels, from our point of view, are strong and encouraging," Mr. Smith says. "They are significant signals to companies that many, many investors want this reform instituted."

From 2004 to 2007, top executives at Bear Stearns Cos., Citigroup, Goldman, J.P. Morgan, Lehman Brothers Holdings Inc., Merrill and Morgan Stanley got about $3.63 billion in salary, bonuses, stock grants and exercised options, according to figures disclosed for executives named in their proxy filings and compiled by Standard & Poor's. Part of that was tied to profits on mortgage-related securities that are now haunting the companies. (Bear Stearns is being taken over by J.P. Morgan.)

As a result of the bursting mortgage bubble, the seven Wall Street companies have taken write-downs totaling $96 billion, according to Asset-Backed Alert, a newsletter that tracks the securitization industry. Their share prices have plunged from their recent peaks by an average of 49% -- far worse than the 10% decline by the Standard & Poor's 500-stock index.

Critics such as the AFL-CIO, a federation of labor unions that closely tracks corporate-pay policies, contend that the losses -- and risky bets that led to them -- can be traced back to the way top executives at big securities companies are paid.

Stock-and-bonus incentive plans explain "why the CEOs at Merrill Lynch and Morgan Stanley and Bear Stearns and their brethren decided to bet the proverbial ranch on sketchy lending and shaky investments," AFL-CIO Secretary-Treasurer Richard Trumka says in a statement. "They cashed in on the short-term stock price and, when the house of cards fell, they didn't pay for it; we did."

Merrill Lynch's former chief executive, Stan O'Neal, left in October with no bonus or severance after the New York company took an $8.4 billion write-down. But he kept $161.5 million in previously earned retirement benefits and compensation because he met the age and service requirements for collecting those benefits.

Charles Prince, Citigroup's former CEO, left in November with perks that included a car, a driver and an office, plus a discretionary $10.4 million bonus for 2007.

At a congressional hearing in March, Messrs. O'Neal and Prince were asked to explain why leaders who steered their companies into the rocks got to keep so much compensation.

Mr. O'Neal noted that Merrill's share price was 60% higher the day before the hearing than the low it had hit shortly after he took over in 2002. "As a result of the extraordinary growth at Merrill Lynch during my tenure as CEO, the board saw fit to increase my compensation each year," Mr. O'Neal said.

In Mr. Prince's defense, Time Warner Chairman Richard Parsons, who heads Citigroup's compensation committee, responded that "only one part of the company really imploded, and that was the part that was focused on these subprime loans." A little more than a month after the hearing, Citigroup announced a $5.1 billion loss for the first quarter of 2008.

At Citigroup's annual meeting last month, more than 29% of investors voted against the re-election of each of the three members of the bank's compensation committee.

That was a stern rebuke, considering that last year no director was opposed by more than 6% of shareholder votes cast. A say-on-pay proposal received 38% of shareholder votes, down from 46% in 2007.

About 13% of Merrill's shareholders opposed the re-election of Armando Codina, CEO of Flagler Development Group and the lone member of the securities company's compensation committee facing a vote at last month's annual meeting. The proposal giving investors a direct say on executive pay at Merrill received 36% support, down from 46% last year.

Merrill Lynch's new CEO, John Thain, has been awarded some options that he will get only if Merrill's stock rises by prescribed levels from its closing price the day before he joined the company. Merrill's share price has fallen 25% since then.

Citigroup, J.P. Morgan, Merrill and Morgan Stanley declined to comment. Boards at all four companies recommended voting against the say-on-pay proposals.