Fair Game
Employees, Too, Want a Say on the Boss’s Pay

By GRETCHEN MORGENSON

Published: April 21, 2012

FINALLY, the shareholders are stirring.

Here and there this proxy season, executive pay is coming under attack from the people who actually own public companies, which is to say, stockholders. At Citigroup last week, a $15 million paycheck for Vikram S. Pandit, the chief executive, got a big thumbs down. Some 55 percent of votes cast went against the package.

One potentially powerful class of shareholders — employees — seems to be rousing, too. And, to the degree that employee-shareholders band together to have their say on the boss’s pay, they can be a formidable force.

Mr. Pandit seems to understand this. On April 13, he sent a memo to Citigroup’s employees, urging them to vote their shares. No surprise, he also recommended that they vote “yes” on the financial giant’s executive pay plans. It is unclear whether Citigroup’s employee-shareholders played a significant role in last week’s vote, which, though not binding, nonetheless was a sharp rebuke for Mr. Pandit and his board.

Traditionally, employee-shareholders have rarely exercised their voting power. But, as the vote at Citigroup suggests, stockholders of all stripes may be starting to assert themselves more.

At another corporate giant, Wal-Mart Stores, a proposal from a small group of workers appeared on this year’s proxy. It is the first employee-shareholder proposal to be put to a vote at that company, and it, too, centers on executive pay. The employees want the board to do an annual analysis, ensuring that Wal-Mart’s pay plans are set up to discourage top management from making capital investments that hurt returns. Wal-Mart’s return on investment is, in fact, falling: it has dropped to about 18.6 percent this year from nearly 20 percent in 2007.

Referring to Wal-Mart’s compensation committee, the proposal states: “We are concerned that recent decisions by the committee may overemphasize sales growth even when that growth is resulting in declining rates of return on investment, and in some cases does not produce returns that cover the cost of capital.”

The employee-shareholder proposal comes as the company has been lowering the bar for executive performance pay. Last year, after Wal-Mart’s same-store sales had been in decline, it began using the benchmark of total sales growth, which had been rising. This year, Wal-Mart reduced the threshold for its return on investment needed to generate incentive pay.

Behind the proposal are four Wal-Mart associates, Carlton Smith and Girshriela Green , from California, and Jackie Goebel and Mary Tifft , from Wisconsin. Three of them have worked at the company for more than a decade and have owned Wal-Mart shares at least that long.

All had grown concerned about the lackluster performance of Wal-Mart’s stock, Ms. Goebel said in an interview. They did not know how to write a shareholder proposal, so they asked for guidance from John Marshall, a capital markets analyst in the Capital Stewardship Program of the United Food and Commercial Workers International Union.

Now they are spreading the word to other employees. “We’re encouraging having proxy parties,” Ms. Tifft said, “not to tell them how to vote but to explain what the process is and what the proposal means.”

Ms. Goebel added, “It’s a way for all of us to hold Wal-Mart accountable for what they’ve been doing for the last 10 years that has been detrimental to all shareholders.”

Wal-Mart is urging its shareholders to reject the employee proposal. It says its board already analyzes incentive pay for executives, so the additional work being suggested would be duplicative.

Besides, shareholders can vote up or down on pay at Wal-Mart, the company said, making the shareholder’s request unnecessary. Its annual meeting will be June 1.

VERIZON is another company whose workers — in this case, retirees — are active in proxy matters. The Association of BellTel Retirees has rattled the company’s cage over pay and other governance practices for the last 16 years.

Over that time, the group has effected change at the company through eight proposals, many having to do with executive pay. Two of those victories were a result of a majority vote of shareholders, and in the other cases, Verizon agreed to make changes to accommodate the retirees.

C. William Jones, a former managing director of corporate planning at Verizon, is president and co-founder of the association, which began with four former employees and now has 128,000 members.

The group took up the fight out of concern that Verizon was cutting back retiree benefits like cost-of-living increases. Mr. Jones said he and his cohorts met with various company retiree groups and gathered support for the association.

“We each contributed $350 of our own money, hired a lawyer and got incorporated,” Mr. Jones recalled in an interview. “We sent out our first newsletter encouraging people to reach out to their friends and sign on. We asked for $12, more if you can and less if you can’t. The money started coming in, and we started gaining members.”

Now the group sends letters to its members every year, advising them how to vote their shares. Broadening its influence, the retirees also communicate with Verizon’s largest institutional shareholders and pension funds.

This year, the retirees are objecting to the fact that Verizon senior executives can receive 50 percent of their target incentive pay even if the company performs below the 30th percentile in its peer group.

“In school, that would be a ‘D’ or an ‘F’; you certainly wouldn’t get a pat on the head for it,” Mr. Jones said. “Our recommendation is that performance should be at least at or above the median in the peer group.”

Verizon has recommended that its shareholders reject the proposal. It said the company’s board has “conducted rigorous design testing” to ensure that its compensation is appropriate and fair.

Robert A. Varettoni, a Verizon spokesman, said the company “respects and values the past contributions of our retirees, so naturally we have an ongoing dialogue with the organization.”

Stephen M. Davis, executive director at the Millstein Center for Corporate Governance and Performance at the Yale School of Management, said social media were making it easier for workers to gain a role in their companies’ governance processes.

He noted, for example, that employee stock ownership plans encouraged worker participation, but that management kept the voting of those shares under pretty tight control.

“That tends to neuter the voting power of employees if they want to vote critically,” he said. “The work-around is social media, and we see more and more cases of employee shareholders and shareholders in general discovering ways to stimulate knowledge of governance issues at companies and encourage critical voting.”

After years of acquiescence, it’s good to see shareholders starting to flex their muscles.

A version of this article appeared in print on April 22, 2012, on page BU1 of the New York edition with the headline: Employees, Too, Want a Say on the Boss’s Pay.