On Friday, May 17, Verizon Communications announced that a proposal allowing shareholders to give a nonbinding vote on executive pay packages had passed, making it the second company to announce such a victory for shareholders.
Shareholder "say on pay" proposals have been a much-discussed issue during the proxy season. And while most of these proposals have failed to pass, experts say the recent shareholder wins might trigger similar votes in coming months.
And if the Senate follows the House of Representatives’ lead on this issue, it is possible all companies might be required to give shareholders a nonbinding vote on executive compensation, experts say. Earlier this month, the House voted in favor of a say-on-pay bill introduced by Rep. Barney Frank, D-Massachusetts. Shortly after, Sen. Barack Obama, D-Illinois, introduced a companion bill in the Senate.
The move toward giving shareholders more say on executive compensation would put savvy HR executives in the spotlight, as they tend to have the best understanding of how executive compensation is structured, says Bill Coleman, president of Salary.com.
Traditionally, CEOs, CFOs and investor relations executives have handled presentations with shareholders, but this new trend speaks to the importance of having HR in the room, if not leading the discussion, he says.
"HR is involved in how the decisions are made around executive compensation and they are the ones who can explain how the packages are linked to performance," Coleman says.
It’s more important than ever for companies to be proactive with shareholders in discussing executive compensation, and HR should be leading those discussions, says Peter Chingos, senior executive compensation consultant at Mercer Human Resource Consulting.
"They should reach out to the top 10 shareholders and give them an update of what the company is thinking regarding executive compensation," he says. "If that doesn’t work, they should then go to the top 20."
Compensation committees should be able to turn to their HR executives and ask, "How will shareholders react to this?" as they are discussing executive compensation packages, says Patrick McGurn, senior vice president at Institutional Shareholder Services, a Rockville, Maryland-based firm that advises shareholders on how to vote on proposals.
McGurn says ISS is increasingly seeing companies bring HR into the room when they meet to discuss executive compensation issues.
But even the most articulate HR executives may not be able to fend off shareholders when it comes to executive compensation, says Mark Reilly, an independent executive compensation consultant based in Chicago.
"Shareholders are upset about the amounts, not whether it’s tied to performance," he says. "It’s not that they don’t understand the thinking behind these packages. It’s that they think they are too high."