Exec Pay Comes To Forefront For Public Companies | P&W Railroad faces shareholder scrutiny
Annual meetings for publicly traded companies are usually pretty boring affairs: heavily scripted and light on drama.
And that was certainly the expectation leading up to Providence & Worcester Railroad’s recent annual meeting. But an issue around executive compensation — and how much say shareholders have on setting those compensation levels — did spark some controversy. And with new federal rules mandating greater transparency in executive compensation at public companies, P&W’s experience may be more the rule than the exception.
Having A Say
On April 28, John Frank stood before a room full of fellow shareholders at Union Station and argued that the amount paid to Providence & Worcester Railroad’s chairman and CEO should be directly linked to his performance, as is the case at many other companies. Specifically, he proposed giving shareholders a non-binding vote on the compensation paid to the chairman of the company.
“I must point out the fact that over the past two years, this company has lost over $2 million,” Frank said.
The proposal drew a cool response from stockholders at the meeting, some of whom characterized it as an attack on longtime Chairman and CEO Robert Eder. More than 90 percent of voting shareholders voted against it.
A non-binding vote on compensation may sound innocuous, but it is new territory for public companies. The closest shareholders have come in the past to having a say on executive compensation was electing the directors who make compensation decisions. And if they were truly unhappy, they could always sell their shares.
But now, thanks to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, companies are required to hold shareholder votes this spring on executive compensation and the issue promises to spark some debate.
New Rules
The Providence & Worcester shareholder proposal was unique in that it was aimed at the chairman and CEO of the company rather than the executive team as a whole, which is what Dodd-Frank requires.
The so-called “say-on-pay” provision of Dodd-Frank requires shareholders to vote on giving themselves an advisory say on the compensation levels of executive officers of companies in which they invest and also how frequently they would like to give such input.
The provision stems from the public outrage over CEO pay and bonuses at Wall Street firms following the financial bailout of 2008.
The largest publicly traded companies are required to comply with the new rules starting this year. But companies with less than $75 million in publicly held shares have two years before they have to comply.
Only a handful of public companies in Central Massachusetts are large enough to mandate compliance immediately: Framingham-based Staples Inc., Framingham-based TJX Cos. Inc., Hopkinton-based EMC Corp. and Milford-based Waters Corp, all of which have annual meetings slated for May and June.
According to a review of recent SEC filings of area companies, most boards of directors are recommending that shareholders approve the advisory votes, which doesn’t surprise George Tetler, a partner at the Worcester-based law firm of Bowditch & Dewey, who represents public companies.
Directors want to present an image of transparency to their shareholders, Tetler said, and recommending to shareholders that they approve an advisory say on compensation looks good.
Tetler said that a number of provisions in Dodd-Frank have led to an atmosphere that could affect the behavior of compensation committees at companies.
“This is the first time that shareholders get disclosure and at least an advisory vote,” Tetler said.
Another provision putting compensation in the spotlight is stricter standards about the use of compensation consultants, Tetler said.
That rule requires publicly traded companies to consider certain factors before selecting a compensation consultant: whether the consultant already provides other services to the company, whether there are any outside personal or business relationships between the consultant and members of the company’s compensation committee and whether the consultant owns any company stock.
While many companies are recommending that their shareholders vote in favor of having a say on pay, Providence and Worcester Railroad’s meeting shows that the new rules are likely to bring any shareholder concerns about executive pay to bear.
In P&W’s case, Eder has seen his annual salary increase from $419,731 to $431,942, a 2.9 percent increase, according to SEC filings.
P&W reported a $264,000 loss on $28.7 million in revenues in 2010 and a $1.8-million loss on $23.3 million in revenues in 2009.
P&W executive compensation packages are based largely on responsibilities and length of service rather than “risk-taking activities,” its filings state.
Attendees of the shareholders’ meeting that were opposed to Frank’s proposal argued that losing money over a two-year period was typical during the recession and was not indicative of the company’s future earnings’ potential. Others argued that Eder had grown the company during his years as chairman and has positioned it for future success. The head of the signalmen’s union argued that shareholders were not properly equipped to provide a comprehensive job evaluation for the position.
While they rejected a say on pay for the company chairman, P&W shareholders, like many across the country, approved an advisory say on executive pay and also approved a measure that specified such a vote would take place every three years, the maximum allowed under Dodd-Frank.
While still relatively new, the Dodd-Frank law’s rules on compensation are already having an effect on larger companies, according to Clearbridge Compensation Group, a New York firm. Clearbridge studied the compensation voting results of the first 100 Fortune 500 companies to hold say-on-pay votes and found a nationwide trend toward minimizing non-performance-based CEO pay.
“For the first 100 companies, this year’s proxy season is ultimately about performance and aligning the pay program with performance,” the Clearbridge report states.
Clearbridge found that the majority of company shareholders are approving the advisory votes to take place every year, the highest frequency allowed under Dodd-Frank.
Clearbridge advises companies to be proactive on the matters of executive pay by performing audits and evaluations of their programs well in advance of shareholder meetings.
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