January 8, 2007

NEW YORK -- Between Apple's options disclosure, an investor push for details of pay consultants' work, and Bob Nardelli's golden parachute, the New Year kicked off with a lot of clamor over executive pay. It's a noise IROs should get used to, and signs of what's to come can be found in a research report on executive pay sent to Thomson Financial clients last week.

Thomson set out to uncover 'perspectives from investors and executives with proxy-voting power.' The market intelligence firm interviewed  27 portfolio managers or chief investment officers and 19 others who influence proxy voting in the capacity of proxy administrators or corporate governance analysts.

According to Glenn Curtis, director of strategic research at Thomson, the spotlight now on executive compensation will continue intensify. 'Both proxy administrators and investors expect the issue to become more important down the line,' he says, pointing out that 50 percent of compliance executives and 43 percent of investors predict their monitoring of executive compensation will increase over the next few years.

That finding was not unexpected considering the ongoing debate about pay. More surprising is the fact that only 35 percent of investors say they're willing to pay a premium or penalize a company depending on the type of executive compensation programs it uses. What's more, just 7 percent of compliance executives admit to paying a premium.

'There are definitely firm opinions out there about executive compensation,' Curtis says. 'I would have expected that 7 percent to be higher.' He suggests one possible reason could be that compliance executives are more in tune with executive compensation programs and have higher expectations, so they may perceive best practices as a given rather than something that should be rewarded.

Among its other findings, Thomson reports that total return to shareholders is ranked as the most important pay-for-performance metric and  performance-contingent stock options are preferred over plain-vanilla options or a mix of both.

While the number one way to monitor compensation practices is to read proxy statements, few survey respondents admit to going beyond the proxy, annual report or - sometimes - discussions with companies' compensation committees. The predicted increase in monitoring looks to be a great business opportunity for financial information providers like Thomson. Why not save institutional investors the trouble of wading through hundreds of proxy statements by crunching the comparisons for them?

Thomson's report foreshadows a controversy filled proxy season. A full 100 percent of compliance executives say their pay monitoring is reflected in voting against or withholding votes for company-sponsored proposals, while 50 percent of all investors say investing or disinvesting are other ways they how their approval or disapproval.

by Neil Stewart