Shareholder campaigns are limiting CEO pay

Bangalore: Shareholders votes on executive compensation at U.S. firms were so much effective that it resulted in a single year CEO pay drop of about $7.3 million (about 38 percent) in firms where pay was excessive, reveals a research led by Fabrizio Ferri of New York University.

The study, which is presented at the American Accounting Association meeting, says shareholder campaigns have been highly effective at limiting stratospheric CEO salaries. Companies that sustained hefty CEO pay reductions during the study's time span (1997-2007) included Yahoo, UnitedHealth, United Natural Foods, Sanmina-Sci, Saks Inc, Sprint, Qwest Communications, Legg Mason, Lennar, KB Home, Constellation Energy, and Apple.

In addition, the study finds that pay-design proposals by institutional investors resulted in average pay reductions of about $2.3 million in companies with excessive CEO pay. Excessive pay is an amount greater than what would be expected on the basis of a number of standard economic determinants, including firm size, return on assets, stock performance, and industry.

The findings would seem to bode well for the increase in shareholders' say on pay likely to result from the major financial-reform bill that President Obama signs into law. The new legislation requires shareholder advisory votes on executive pay at least once every three years (and, subject to the decision of the shareholders, possibly as often as every year) in all companies or categories of companies not specifically exempted by the SEC.

"This study casts doubt on the two most frequent criticisms of increased shareholder say on pay -- either that it will be largely ineffective or that it will lead to radical changes dictated by unions or other special-interest groups," comments Fabrizio Ferri of New York University, who carried out the new research with Yonca Ertimur of Duke University and Volkan Muslu of the University of Texas at Dallas.