CalSTRS Guidelines Offer Substance on Executive Pay

May 5, 2009

SACRAMENTO, CA– With risky behavior and excessive executive pay blamed for fueling the economic crisis, the California State Teachers’ Retirement System (CalSTRS) is calling for more responsible executive pay policies.

Today, CalSTRS launched an initiative that calls on 300 of its portfolio companies to develop comprehensive executive compensation policies and to allow shareholders advisory votes on those policies. The goal is to reward long-term thinking and improve pay-for-performance practices while deterring excessive risk taking.

This initiative includes the publication of executive compensation model policy guidelines and communication with targeted companies that stresses using those guidelines. Advantages to adopting the CalSTRS-proposed model guidelines include the development of long-term views on compensation and the setting of baselines for evaluating the effectiveness of the resulting compensation programs.

“CalSTRS has a long history of promoting responsible compensation policies that link pay to performance and align shareholder and management interests,” said Anne Sheehan, CalSTRS director of corporate governance. “We see our efforts as key to improving long-term returns and meeting our fiduciary duty to California’s teachers and their families.”

The CalSTRS initiative started with letters to 300 of its largest holdings communicating the fund’s support for an advisory vote on compensation.

Model Principles

To help companies develop compensation policies, CalSTRS provided model principles and guidelines that include key elements of a policy along with goals and objectives to consider in developing a policy. The CalSTRS principles offer companies a five-part approach that calls for:

• A clear overarching philosophy that aligns the interests of shareholders and management A well designed, comprehensive compensation policy that takes a detailed look at all of its components
• Transparency through a plain-English description of a well-crafted compensation plan
• Accountability through a responsible compensation committee
• A compensation committee comprised of independent directors using only independent advisors and consultants

“Our model policy and principles for executive compensation seek to bring coherence to an exceedingly complex issue,” Sheehan said. “There are no easy answers to addressing the problem of poorly aligned executive compensation. But nothing can be achieved without the communication and agreement between companies and shareholders called for in our guidelines.”

CalSTRS will follow up with targeted companies through stepped-up communications, emphasizing use of the guidelines and, if necessary, withholding proxy votes on directors and compensation plans.

The California State Teachers' Retirement System, with a $111.6 billion portfolio, is the second largest public pension fund in the United States. It administers retirement, disability and survivor benefits for California's 833,000 public school educators and their families from the state's 1,400 school districts, county offices of education and community college districts.