Business Day

Fair Game

If Shareholders Say ‘Enough Already,’ the Board May Listen

Published: April 6, 2013

A more important question may be this: Do this year’s figures show any evidence of progress toward a new pay paradigm? You know, where the gap between the compensation of executives and workers narrows, or where company directors put shareholders’ interests before those of the hired hands?

After looking over the numbers, I asked some experts in the compensation arena if they’d seen any promising shifts toward greater fairness in executive pay.

“The more things change, the more they stay the same,” said Brian T. Foley, an independent compensation consultant in White Plains.

Still, there were some encouraging signs. Some outliers, like Alan R. Mulally of Ford Motor and James P. Gorman of Morgan Stanley, took pay cuts in 2012 because their company’s performance declined. That’s the way it’s supposed to be.

And there are some cases where shareholders are actually reining in executive pay. Consider the work of some 128,000 Verizon shareholders who are also retirees of the company.

Known as the Association of BellTel Retirees, this group, for the last 15 years, has achieved a series of corporate governance and executive compensation changes at the company. This year, the association won a partial victory in a battle over performance-based stock awards. The company, according to its proxy statement, agreed to reduce such awards to senior executives when Verizon shares underperformed, a change the retirees had urged.

The retirees have also proposed that Verizon shareholders approve any severance package that exceeds 2.99 times an executive’s base salary plus incentives. This proposal will be voted on at the company’s annual meeting on May 2.

There is movement elsewhere, too. James F. Reda, an independent compensation consultant in New York, said he was noticing a shift among boards to award lower compensation to incoming chief executives, especially if they are from inside the company. “When new C.E.O.’s are hired, in a lot of cases, they are getting below-median total-compensation packages, with the idea that higher pay will get phased in over time,” Mr. Reda said. “New hires are not coming up to the C.E.O. level of pay right away as they did in the past. Now boards are making sure that they work out.”

Mr. Reda’s point brings up what compensation experts say may be the most formidable roadblock to fairer pay practices: longstanding chief executives who prefer the status quo and who hold sway over their directors.

Jon F. Hanson joined the board of HealthSouth in late 2002, just before a long-running accounting fraud at the company came to light. He has been its chairman since 2005 through a turnover of the company’s top management and board. “When a new C.E.O. comes in,” he said, “it emboldens the compensation committees to look at the methods we are using to compensate our C.E.O.”

In a vote last year, 98.8 percent of HealthSouth shareholders supported its pay practices; the compensation of its C.E.O. Jay F. Grinney stayed essentially flat last year, even though the company turned in solid gains in the period.

“It’s the hardest to introduce a new form of compensation when you have a long-entrenched C.E.O.,” Mr. Hanson said.

There are plenty of those around, of course. And that may explain why a pay practice that has contributed mightily to ever-rising compensation — the use of the corporate peer group — remains intact at most companies.

Using peer groups to determine executive pay was supposed to ground it in reality, basing it on the practices of similar companies. Instead, such benchmarking created a kind of arms race in pay.

One problem is that the makeup of the peer group is easily manipulated. For example, if a medium-size company uses much larger and more complex businesses as its benchmark, its compensation can be skewed, sending it far higher than it should be.

“Peer-group data is, as always, part art, part science,” said Mr. Foley, the compensation consultant. “It can be very constructive if done well, but can also be heavily gamed.”

A decade ago, directors at the New York Stock Exchange awarded Richard A. Grasso, its chief executive at the time, $140 million in compensation. He was compared against a peer group made up of companies with median revenue more than 25 times that of the exchange and median assets 125 times its own.

A furor erupted back then, but the reliance on peer groups goes on. A compelling paper on the problems with peer groups was published last fall by Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, and Craig K. Ferrere, a fellow there. In it, the authors argue that corporate directors should eliminate peer groups and instead “develop internally consistent standards of pay based on the individual nature of the organization concerned, its particular competitive environment and its internal dynamics.”

Investor groups have embraced this argument against benchmarking, said Yale D. Tauber, the director of programs on executive compensation at the Conference Board Inc. “There is a growing dissatisfaction with where benchmarking takes us,” he said.

BUT effecting change in the boardroom on pay matters is a glacial process.

“When you have a new idea that is different from the status quo, there’s always some resistance to it,” explained Mr. Hanson, the HealthSouth chairman. “The dialogue is in the early stages, but at least people are discussing management’s compensation and benchmarking it against how they are performing and how the shareholders are doing. Management is beginning to realize that it’s not just about their compensation. We also have to make sure that the shareholders benefit. That’s the change I’m seeing.”

Let’s hope these discussions turn into action sooner than later.

A version of this article appeared in print on April 7, 2013, on page BU1 of the New York edition with the headline: As Shareholders Say ‘Enough Already,’ Some Boards Are Starting to Listen.

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