DMI Blog

Harry Moroz

Liveblogging the Marketplace of Ideas: Giving Shareholders a “Say on Pay”

Keyes at Podium.jpg[Ed. Note: Please find resources about say on pay at the bottom of the live blog. HM]

Welcome to the live blog of the Drum Major Institute’s Marketplace of Ideas series! Today we’re hosting Blockbuster Chairman and CEO James Keyes for a discussion of Blockbuster’s “say on pay” policy.

The forum is the third in our fall Marketplace series. Last month, Sean Arian, head of economic development for the City of Los Angeles, talked about improving the quality of jobs and the air at the nation’s ports. In September, Governor Jon Corzine spoke about New Jersey’s paid family leave legislation.

Mr. Keyes will discuss the Blockbuster Board of Director’s decision to grant shareholders an annual nonbinding vote on executive compensation, a so-called “say on pay”, starting in 2009.

CEOs at S&P 500 firms make 344 times more than the typical U.S. employee, while thirty years ago they earned “only” 40 times more. The average compensation package for these CEOs was $10.5 million in 2007. Laws requiring say on pay are on the books in Britain and a small number of U.S. companies like AFLAC and Verizon also have adopted the reform.

Panelists include the Honorable William C. Thompson, New York City Comptroller; Tim Smith, Senior Vice President of Walden Asset Management’s Environment, Social, and Governance Group; and Vonda Brunsting, the Assistant Director of the SEIU Capital Stewardship Program. DMI’s Executive Director Andrea Batista Schlesinger will moderate.


Councilmember David Yassky introduces the Marketplace of Ideas series, the panelists, and Mr. Keyes, along with Blockbuster’s say on pay policy.


Mr. Keyes thanks DMI for being progressive, practical, and effective, particularly because he believes he is progressive, practical, and effective.

Mr. Keyes admits that speaking about say on pay is strange for him. But he realizes that Blockbuster needs to transform the company not only for customers, but also for shareholders through trust and transparency. Proximity between shareholders and the company is important.

Mr. Keyes served as the president and CEO of 7-Eleven. He worked his way up from inside the company. Sometimes he felt like a “second-class citizen” and is now “more sensitive” because of it. A Japanese company became 7-Eleven’s largest shareholder and had a rule that the highest paid executive should make no more than about 20 or 25 times the average employee. Equity-based compensation helped at 7-Eleven.

Mr. Keyes left 7-Eleven and took a job with Blockbuster as an opportunity to create change, a chance to create value. Creating value for Blockbuster would create value for him. “I suggested a compensation package that was a bit unusual.” Mr. Keyes took a salary base in about the 25th percentile and agreed that all of his incentive would be based in equity appreciation: 100% of his bonus and other incentives were to be based on equity. He would get “no country club memberships.”

“It is easier to relate to [store managers] if they are not reading about” executives with large compensation packages. Mr. Keyes says he was putting his nest egg back at risk by returning to Blockbuster.

The compensation package was unusual, but worked effectively for Blockbuster.

keyes 3.jpgBut then a proposal for say on pay was proposed to Mr. Keyes. Comptroller Thompson also submitted a proposal for Blockbuster to adopt say on pay in 2005. “My reaction,” says Mr. Keyes, “was to say ‘I’m here. Of course we don’t need this.'” But in March of 2008 Blockbuster adopted the say on pay policy for 2009.

Since the policy is voluntary, Blockbuster created a committee to meet with shareholders and work out a solution in the case that the Blockbuster board did not follow the shareholder vote.

There are challenges to performance-based compensation. Performance-based compensation is not always employee-friendly. Blockbuster has turned in three quarters of same-store sales increases, but stock prices are at all-time lows. With a performance-based structure like Blockbuster’s there is a disconnect perhaps between performance and shareholder value. On the other hand, it takes a long time for performance to translate into value on Wall Street.

Say on pay, equity-based compensation is based on the long term, on incentivizing employees for the long-term. Some say that say on pay is symbolic, but there are clearly consequences for companies that ignore the voice of shareholders. Boards of directors cannot ignore this type of voice – there are teeth: “We are going to loose shareholder confidence over time.”

Private equity firms are creating a new kind of CEO who is more sensitive to value creation. “If we have any chance of success, we recognize the importance of building trust and accountability” for both shareholders and customers.


Thompson.jpgAndrea introduces the panel and begins with Comptroller Thompson.

Andrea asks the Comptroller why he decided to put the power of the money he controls behind say on pay.

The Comptroller says that New York’s is the most progressive pension fund in the country. “We’ve been aggressive” in aligning the interests of shareholders and management.

Comptroller Thompson says that the ratio of executive compensation to typical employees in 1980 was 40 to 1, by 1990 that ratio had doubled, by 2003 that ratio had become 400 to 1.


Andrea introduces Mr. Smith.

Andrea asks whether the issue is the process or is it how much: is pay too much or is the process by which pay is set the problem?

smith.jpgMr. Smith thinks that it is a blend of the two. Shareholders have different perspectives. Some believe that the gross pay is simply too much, for instance at Occidental Petroleum Corporation. Other investors believe that the compensation needs to reflect performance.

This year about 100 companies will receive the say on pay proposal. You need mainstream investors voting for it. In the next year or two, Congress will most likely act and an advisory vote will be instituted. “We are advising companies to act in a statesmanlike way.”

Aflac had its first vote and got a 95% vote in favor.

Comptroller Thompson notes that Congressman Frank will move forward with advisory say on pay legislation and President-elect Obama introduced similar legislation in the Senate.


Andrea introduces Ms. Brunsting and asks how say on pay fits into the progressive movement more broadly.

brunsting.jpgMs. Brunsting says that there are tools beyond say on pay that address Andrea’s question. She points to the consensus about excessiveexecutive compensation following the bailout. But the shareholder tool – say on pay – is a good one to use and Congress will act – this is one way to keep compensation in check.

Andrea says that there are three ways that shareholders have a voice already in executive compensation, according to Capitalism Magazine: to vote with your dollars (sell shares); accumulate a controlling interest and force a new board; and persuade a majority of shareholders to replace the board. Can the panelists speak to this?

Comptroller Thompson says that these three “tools” basically mean “Do nothing, do nothing, do nothing.” All three are very expensive and very difficult to exercise.

Mr. Smith says to companies that say that shareholders already have a say on pay – just change the board – you may think executives are doing a good job, so removing the board is too blunt a tool. An advisory vote is a caution.

Ms. Brunsting notes that it is very frustrating for shareholders to be “outside the room” and have no say.

Mr. Keyes believes that “the spirit of the [Capitalism Magazine] article is right”: over time self-regulation does work. “Self-regulation over time works.” The problem with executive compensation now is that changing the board of a company could take far to long. Legislation could cause unintended consequences. The advisory vote does not cause the unintended consequences that legislation would create.

Comptroller Thompson does not agree that self-regulation is sufficient, but emphasizes his support for say on pay.


ABS and Keyes.jpgAndrea asks how Mr. Keyes’s peers think about say on pay and what arguments would persuade them to change their minds if they oppose it.

Mr. Keyes thinks there is generally an adverse reaction to change on the part of his colleagues, especially with regard to regulations. They might think say on pay could drive employees away. “Our first reaction” was that it was bad, but eventually at Blockbuster they realized that it was not bad for the company.

Andrea asks if the strategy of advocates for say on pay should be to persuade CEOs or to mobilize shareholders?

Comptroller Thompson does not think many CEOs will voluntarily submit to say on pay.

Ms. Brunsting notes some support for say on pay from unusual sources: a libertarian think tank and Carly Fiorina, former CEO of Hewlett-Packard. Forces are coming together.

Comptroller Thompson agrees that the perfect storm is coming together. He talks about the effect of the bailout. If a company takes public money, will part of that go to an executive’s bonus?

Mr. Smith notes that other parts of pay are being discussed in the bailout legislation. For instance, clawbacks to retrieve compensation granted that was based on false figures. There is a business case to be made, a self-interest case to be made. Except for about a dozen companies, very few have responded positively to what he thinks is a cogent case [for say on pay].


Andrea quotes Mayor Bloomberg’s hesitance about limiting executive compensation (not specifically with regard to say on pay) and asks Comptroller Thompson for his thoughts.

Thompson smiling.jpgComptroller Thompson doesn’t think we are tying high pay to talent and respectfully disagrees with the Mayor.


An questioner from AFSCME asks Mr. Keyes about the potential of say on pay to create a conversation about compensation early on in negotiations about executive pay. What would be the most helpful communication strategy to facilitate communication between shareholders and executives? What about executives holding their equity past their tenure at a company?

Mr. Keyes talks about the difficulty of listening to the voices of all of his employees. He communicates with a subset, a small group, and is willing to do the same with shareholders. Mr. Keyes is mixed about holding equity past tenure. At least, we need to be sensitive to future management.


A questioner asks whether Mr. Keyes has difficulty attracting talent and asks whether the Obama administration will attract more diversity in management.

Mr. Keyes sees say on pay as an advantage to recruiting, but notes that he is not the norm. He would like to surround himself with people who are more interested in uniting wealth creation and value creation.

Comptroller Thompson thinks that what senior members of the Obama administration “look like” will inspire change. It won’t be what you see legislatively, but companies might start believing that change and diversity is important for them.


A questioner asks what the equivalent of say on pay is in the nonprofit sector.

Ms. Brunstring notes that the pay disparity between the nonprofit and private sectors in the United States is much greater than other in other countries.


Andrea asks about the success of say on pay in the UK and asks Comptroller Thompson if there is a competitive advantage to adopting say on pay.

Mr. Smith says that in the UK there are votes on say on pay and the votes engender much discussion between shareholders and companies so that they are not surprised by a negative vote. It is a stimulus for conversation. The vast number of votes are in favor of compensation, but there are a number where there are problems and those votes send a message.

Comptroller Thompson doesn’t know if there is an advantage to adopting say on pay, but it does improve communication.


Panel.jpgA questioner asks whether pay packages become simpler and more understandable when say on pay is instituted.

Mr. Keyes says he thinks so. Compensation packages used to include lots of “extras”, but now people say “I want my own country club” and “I want my own car” and realize that those extras don’t need to be included.


A questioner wonders how executives and even shareholders stay attuned to low-income individuals.

Mr. Keyes notes that people do not know Blockbuster as him but as Blockbuster's employees. He tries to visit stores as much as possible.


Andrea wonders whether say on pay is a means of addressing wealth inequality.

Ms. Brunsting believes that say on pay is a way to enter into the conversation and gain a seat on the table.

Comptroller Thompson says that say on pay is not a way to better align workers with executives. There are other shareholder resolutions to do that, from environmental to community-based interaction. “We don’t run companies,” the Comptroller notes, "management does". “We want a voice.”


A questioner asks to what extent Blockbuster is incorporating sustainability as part of compensation packages.

Mr. Keyes says that as companies look at their cost structures, compensation will come under the spotlight. We may want to keep more employees and then we will have to cut compensation.

Mr. Smith says that in companies with key strategic objectives, top executives get compensation for achieving those objectives.


A questioner wonders if Mr. Keyes has had to prepare new ways to prepare shareholders now that they vote on compensation packages.

Mr. Keyes says that even before say on pay Blockbuster was trying to be more transparent. But making things easy is difficult.

Ms. Brunsting notes that compensation packages are long and very complicated. The issue is not only transparency, but simplicity.


A questioner asks about public opinion.

Ms. Brunsting says that her members have forced the SEIU to think more about say on pay.

Comptroller Thompson says that he communicates with his trustees – a collaborative effort.


A questioner wonders about accountability – and urgency, Andrea adds – if efforts to expand say on pay are successful.

Mr. Smith says that his investors try to think long-term.

Comptroller Thompson says that as the economic downturn shows, you have to pay attention in good times as well as bad.


with others.jpgAndrea asks where the panelists believe executive compensation will be in ten years.

Mr. Smith hopes that pay will be clearly explained, shareholders will be communicated with about pay, and their views incorporated.

Mr. Brunling hopes that there is a shift away from the “short-termism” of the market to long-term shared ownership. Pension shareholders are long-run shareholders. Ms. Brunling hopes that other shareholders will take the same view.

Comptroller Thompson thinks that many more corporations will be in the place where Blockbuster is now, but does not think they will go there voluntarily. Left to their own devices, many companies will hope that say on pay goes away.

Mr. Keyes thinks that there will be a much more regularized pay scheme in ten years and government regulation will have a big impact. Companies are going to have to mandate fiscal responsibility.

Andrea thanks the panel and the audience and the event ends.

Say-on-Pay Legislation in Congress:

Shareholder Vote on Executive Compensation Act of 2007 (H.R.1257)

Senate Shareholder Vote on Executive Compensation Act of 2007 (S.1181), as introduced by Senator Obama.

"Obama Calls for Hearing on Bill to Give Shareholders Vote on Executive Pay," May 30, 2007.

U.K. Say-on-Pay Resources:

Deloitte & Touche, LLP. “Report on the Impact of the Directors’ Remuneration Regulations: A Report for the Department of Trade and Industry,” 2004 Nov.

Gopalan, S. “Say on Pay, and the SEC Disclosure Rules: Expressive Law and CEO Compensation,” Pepperdine Law Review. 2007;35:207.

ISS International Research Analysts. “Improving Pay Practices,” Risk and Governance Blog. 2006 Sep 18.

Davis, S. “Does ‘Say On Pay’ Work?
Lessons on Making CEO Compensation Accountable. Policy Briefing No. 1
,” [DRAFT] 2008.

Odell, AM. "’Say on Pay’ Highlighted in the Upcoming 2007 Proxy Season,” Social Funds. 2007 Jan 30.

Taub, S. January 29, 2007. “Institutional Investors Eye "Say on Pay",” 2007 Jan 29.

Thompson, S. “The Impact of Corporate Governance Reforms on the Remuneration of Executives in the UK,” Corporate Governance: An International Review. 2005 Jan;13(1):19–25.

Thompson S, Girma S, and Wright PW. "Corporate Governance Reforms and Executive Compensation Determination: Evidence From The UK," Manchester School. 2007 Jan;75(1):65-81.

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Posted at 8:00 AM, Nov 13, 2008 in Corporate Accountability | Economy | Financial Justice
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