Unions, As Shareholders, Use Bailout to Push Executive Compenstion Reforms

Unionyes My labor and employment law colleague, Phoebe Williams, who also teaches business associations, brings to my attention the roles unions, as shareholders, are seeking to play in the current government bailout scheme.

According to the Risk and Governance Blog:

The Laborers’ International Union of North America and the International Brotherhood of Teamsters are filing new proposals that seek compensation reforms at companies that participate in the U.S. Treasury Department’s bailout program.

In the supporting statement for these 2009 resolutions, the labor funds argue that the pay restrictions in the Treasury’s Troubled Asset Relief Program (TARP) “fail to adequately address the serious shortcomings of many executive compensation plans.” Instead, the unions urge directors to adopt “more rigorous executive compensation reforms that we believe will significantly improve the pay-for-performance features of the Company’s plan and help restore investor confidence.”

According to the Associated Press, more than 110 financial firms have indicated that they likely will participate in the TARP’s Capital Purchase Program, under which the government has so far committed up to $250 billion to buy preferred stock. The labor funds have filed this resolution at JPMorgan Chase, KeyCorp, Bank of America, American Express, and SunTrust Banks, and plan to submit the proposal at more than 45 other firms.

The proposal calls for directors to adopt the following reforms:

* Limit annual incentive compensation to an amount not exceeding one times the senior executive’s annual salary;

* Require that a majority of long-term compensation be awarded in the form of performance-vested equity instruments;

* Freeze new stock option awards to senior executives, unless the options are indexed to peer group performance so that relative, not absolute, future stock price improvements are rewarded;

* Require senior executives to hold for the full term of their employment at least 75 percent of the shares of stock obtained through equity awards;

* Prohibit accelerated vesting for all unvested equity awards held by senior executives;

* Limit all senior executive severance payments to an amount no greater than one times the executive’s annual salary; and

* Freeze the accrual of retirement benefits under any supplemental executive retirement plan (SERP) for senior executives.

The labor unions urge directors to adopt all of these reforms unless barred by existing executive employment agreements.

In short, the bailout has presented an opportunity for unions to actively challenge excessive executive compensation. This is an example of how unions through their roles as shareholders are seeking to influence executive pay, voting for boards of directors, and other corporate governance issues.

Cross posted at Workplace Prof Blog.

This Post Has One Comment

  1. Nadelle Grossman

    I think it’s great that this large class of investors supports boards in adopting executive compensation packages that reward executives for long-term performance. But we should keep in mind that “rampant” executive compensation is not simply the doings of irresponsible boards – executives are rewarded for short-term performance also (and perhaps primarily) because most investors, who hold their shares for not much longer than a year on average, want short-term returns. That’s not to say that pension funds are short-term investors – they traditionally hold their shares longer than hedge funds and actively managed mutual funds. But in my view, mandating that boards adopt long-term compensation schemes is only a band-aid to the real problem of stock market short-termism that exists because stock prices only reflect short-term values, and investors are rewarded for short-term speculative trades.

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