Some Early Returns From The 2013 Annual Meeting Season

A True “Sea Change” In Executive Pay Practices, We Say…

Although it seems to have gotten lost in the mountains of proxy-voting commentary and analysis that have been over-filling our in-boxes these days, we believe we are witnessing a major, and a totally unprecedented tipping-point where executive pay is concerned:

In mid-January, the JPMorgan board voted for what the WSJ called a “Whale” of a pay cut – a whopping 50% decrease for 2012 vs. 2011 – which put JPMC’s Chairman $ CEO Jamie Dimon roughly on-par with the CEO of still floundering Citigroup, with just over one third of JPMC’s 2012 net income. The same article noted CEO pay cuts for shaky performance last year at AT&T, Avon Products and P&G.

Meanwhile, after meetings with big activist investors - like the AFL-CIO and others - to try to head-off another Say NO On Pay vote - Citi tightened its pay-for-performance metrics and agreed that no “performance units” at all will be awarded if performance lags behind three quarters of its eight peer-group banks. Citi, under pressure too from NYC Comptroller John Liu, also broadened its claw-back provisions to include more officers, and more disclosure…joining a long list of banks on Liu’s list that have agreed to additional pay claw-backs, like Capital One, Goldman Sachs, Morgan Stanley, JPMC and Wells Fargo Bank.

On the non-bank scene, companies like CenturyLink, Dell and Diebold will not award performance shares if investors lose money over a three year look-back…with more such moves to come, we guarantee.

In connection with this year’s annual meeting disclosures, Chevron announced that its board “took into account certain operating incidents in 2012” – with a 13% cut in the CEO’s bonus - and 15% and 16% cuts in the 2012 bonus awarded to two other top execs. Johnson & Johnson cut the CEO’s bonus by 10%, its proxy statement said, “To hold Mr. Gorsky accountable for the company’s 2012 performance”… and cut other senior officer bonuses, including the CFO’s, by 10% as well.

Under pressure from a group of 13 US & UK investors, led by the UAW Retiree Medical Benefits Trust, six US drug companies – Amgen, Biogen, Bristol Myers Squibb, Johnson & Johnson, Eli Lilly and Merck – agreed to claw back pay from execs who violate ethics rules or behave inappropriately – even if no financial restatements result, joining Pfizer, which agreed to similar provisions last year.

In 40+ years of observing the annual meeting scene, your editor can not recall a single year where so many governance changes – much less pay-related ones – were made by US companies. A major sea-change this season, for sure.

So what’s behind all this? It’s mainly in the math, as another article illustrates below, and clearly we hope:

Institutional investors now hold roughly 70% of all shares – on average – and often, where mega-cap companies are concerned – a lot more. Many of them are MAD – at what they see as excessive pay – but mainly they are fighting-mad these days about pay schemes that do not tightly tie executive pay to corporate performance. (The real wonder here is why it took them so long to wake up! - See the next article.) And, as we constantly remind… institutional investors always vote their shares.

Add to this another big change – Says-On-Pay – and – an even bigger “sea change” on the corporate governance scene, for sure – the widespread move to majority election of directors – coupled with the very real threat these days, of directors coming up “way short” on votes - and maybe not being elected at all.

So readers…if you haven’t done so already, better kick your electioneering and vote gathering machinery into high gear!

And p.s.…just in case you missed it, the actual pay scales swung dramatically over a “tipping point” in 2012:

A March 21 WSJ chart created by the Hay Group shows that 65.3% of pay in 2009 was salary, options and restricted stock, with only 34.7% “performance related” - while in 2012, 50.6% of CEO pay was in annual bonus and awards of cash and stock that are tied directly to performance.