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Campos Urges Companies To Consider Shareholder Advisory Votes on Executive Compensation

In remarks at a recent New York summit on executive compensation, SEC Commissioner Roel Campos challenged the idea that CEO pay reflects a free and competitive market. He is also skeptical that boards of directors will be able to control excessive executive pay. Campos posed a number of possibilities to address what many consider excessive executive compensation, including the use of negotiating teams and allowing shareholder advisory votes similar to practices in the U.K. and Australia. Campos said the idea of allowing shareholder advisory votes on executive compensation has not yet hit critical mass, but he believes it may become a hot-button topic for shareholder proposals. His remarks were posted on the SEC's Web site.

Some believe the SEC's new executive compensation disclosure rules will lead to lower CEO pay, but Campos said he was not so sure. It may have the opposite effect as CEOs become more aware of what their peers are making and demand the same or more. Executive compensation, and particularly CEO compensation, seems excessive to almost all outside observers, he said. While many see the free market at work, Campos pointed out that many boards are made up of CEOs from other companies who themselves would benefit from higher CEO wages.

Campos believes that many boards seek director candidates based largely on compatibility with the CEO. The result is what he labeled the "ingrate dynamic," in which the director does not want to appear unappreciative by voting to lower the CEO's pay. Campos believes that independent directors will continue to face pressure to award ever-increasing amounts of compensation.

Campos urged directors to do their homework before an executive is hired. It appears that many boards do not grasp the ramifications of their executive pay decisions, he said, especially with regard to severance pay, pensions and golden parachutes upon termination. The SEC's executive compensation disclosure rules should help compensation committees focus on the pay package as a whole. The new disclosure rules also require a discussion of arrangements related to resignations, severance, retirement or terminations.

Campos suggested that boards could set up a negotiation team to work with the compensation committee, led by a neutral professional whose objective is to arrive at a fair compensation package. Many believe that compensation consultants have contributed to the rise in CEO compensation, he noted, and that many lack complete independence. The SEC's new rules require disclosure about the role of compensation consultants in determining or recommending the amount or form of executive and director compensation.

Campos said he would support the creation of a group comprised of business leaders, academics and former public servants to consider the executive compensation issue. The group may be able to form a recommendation about the multiple by which a CEO's pay should exceed average workers' pay and what constitutes an appropriate severance package, he said. He also suggested that an independent compensation group should look at international practices as well.

In Campos' view, boards should consider giving their shareholders an advisory role on executive compensation. Campos said he is sure companies' natural inclination would not be to allow advisory votes, but pointed to a number of potentially positive outcomes. Advisory votes would foster a dialogue with investors and give shareholders a sense of empowerment, he said, even though the votes would not be binding. It could lead to better relations between boards and shareholders and may fend off proxy contests.

Campos urged companies to consider being proactive on shareholder advisory votes and adopting policies before they are forced to include the issue in their proxy materials.

Jacquelyn Lumb