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‘Say on pay’ gains steam amid exec-reward debate

The debate over bailing out Wall Street and voters’ rancor over the finance world’s famously well-paid chief executives have placed a megawatt spotlight on executive compensation, with even the pay policies of publicly owned restaurant companies coming under scrutiny.

The clamor of calls to ensure that executives at failed financial firms do not walk off with fat paychecks at taxpayer expense could add substantial momentum to a movement toward curbs on pay deals of all kinds.

“Say on pay” shareholder resolutions—which allow shareholders to cast non-binding, or advisory, votes on proposed executive compensation—already were gaining momentum in recent years, and experts say that will only increase into future proxy disclosure seasons.

“In times like this, accountability becomes a key watchword, and initiatives that build accountability will be gaining in ascendancy,” said Timothy Smith, senior vice president of Walden Asset Management and former executive director of the Interfaith Center on Corporate Responsibility, a group of asset-management firms, labor organizations and public pension funds that sponsor shareholder resolutions.

Smith is part of a shareholder coalition that has backed say-on-pay resolutions targeting Yum! Brands Inc. for the past two years. Yum, whose brands comprise the world’s largest restaurant system in number of locations, may be the only foodservice player to have been hit so far with this type of recommendation, though institutional investors and watchdogs have criticized The Cheesecake Factory Inc. and others over compensation issues.

For example, the shareholder advisory firm Proxy Governance Inc. last year criticized the pay package for Tilman Fertitta, chief executive of Landry’s Restaurants Inc., as being “out of line” with those of comparable operators. The firm said his pay in 2006 was 351 percent above the median for CEOs of “peer companies.” Despite Landry’s lackluster results, Fertitta’s base pay of $1.4 million, a $1.5 million bonus, $883,409 in other compensation, and $11.4 million in stock awards totaled $15.3 million, even ahead of the $13.7 million paid that year by coffeehouse giant Starbucks Corp. to its former chief executive James Donald, who was the industry’s No. 2 earner.

As for Yum, Smith said his coalition has already filed another motion with the company for next year, in a bid to tap the momentum of increasing shareholder support for say on pay, though the motion failed to gain passage for two years running, as Yum’s board has recommended.

Similarly, the U.S. House of Representatives last year passed a say-on-pay bill that would require public companies to let shareholders cast nonbinding votes on compensation plans, and Sen. Barack Obama, D-Ill., this year pushed for his companion bill, but to no avail. Sen. John McCain, R-Ariz., raised the say-on-pay issue in a June speech on his economic proposals.

Shareholders of foodservice-related firms, including Coca-Cola Co., also brought resolutions related to executive compensation to the table this year. Last spring, insurer Aflac and video-retailer Blockbuster made headlines by becoming some of the first major public companies to approve shareholder votes on executive compensation. In the first nine months of 2008, advisory votes on compensation proposals racked up a 42.1-percent support total, up from 40.1 percent support on a far smaller base in 2006, according to study by RiskMetrics Group Inc. of New York.

Authorities say the 2009 proxy season, which companies prepare for now by finalizing budgets and corporate paperwork, will be another busy one for say-on-pay resolutions. As these motions gain support, some experts say companies should include a resolution of their own design, or otherwise face increased shareholder activity or, even less palatable, a government mandate.

“A lot of companies have potentially missed the boat by not voluntarily instituting these agenda items when they can control what they are asking shareholders to vote on,” said Carol Bowie of RiskMetrics. She leads the Governance Institute of RiskMetrics’ ISS Governance Services unit, the company’s proxy advisory division.

Some compensation watchers say corporate control over executive-pay packages may be out the window depending on details of the government plan for a Wall Street bailout, which already has included a cap on CEO pay for certain failed institutions. Since its U.S. emergence in 2006, the say-on-pay agenda had been considered a liberal cause, supported by unions, large pension funds like the California Public Employees Retirement System and activist investors. In the first nine months of 2008, however, shareholders proposed more than 100 resolutions on executive compensation, including 76 calls for shareholder advisory votes, according to RiskMetrics. Some 10 resolutions received more than 50 percent support to gain passage.

“It was one of the hot-button issues, and it touched a lot more companies this year,” said Rajeev Kumar, senior managing director of research at Georgeson Inc., a proxy solicitor and advisory firm, “and the expectation is that its scope will only grow.”

The congressional bailout of insolvent lenders was still pending at press time, leaving uncertain the scope of executive-compensation limits. However, say-on-pay rules stand to become law in the aftermath, regardless of who wins the presidency, pundits have predicted.

In its 2008 proxy materials, Yum acknowledged that shareholders play an important role in corporate governance, but the company said a vote on high-level compensation is not appropriate and could hinder executive recruiting.

“We do not believe that reducing the complex decisions that go into designing and administering a compensation program to a ‘yes’ or ‘no’ vote is an effective or efficient way to obtain shareholder input,” Yum stated. “Implementing an advisory vote at Yum while not implementing the same vote at…competitors and peers would put Yum at a competitive disadvantage.”

The company did not respond to requests for comment.

The Louisville, Ky.-based parent of the Taco Bell, Pizza Hut and KFC brands has been targeted by activist shareholders in the past, and say on pay was just one of several policy initiatives last year. The latest say-on-pay vote at Yum garnered about 42 percent support, on par with the average for other companies that faced such resolutions.

“The resolution is not an attack particularly on Yum,” said Walden Asset Management’s Smith. “It’s a way of prodding companies to pay more attention to shareowners in terms of executive pay philosophies and metrics.”

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