The Arrival of Say on Pay: Occidental & Motorola (Part 3)

So what impact is say on pay likely to have in the United States?  It is hard to say how it will affect management (the vote is advisory, after all) but recent evidence indicates that shareholders will not be afraid to register their opposition. 

Although say on pay votes remain rare in the US, shareholders this month in two companies (Occidental and Motorola) voted no on the compensation matter submitted to them.

With respect to Occidental, the CEO (and chairman), Ray Irani, had total compensation in 2009, according to the company's proxy statement, of $31,401,356, mostly in the form of equity.  The WSJ, however, reported the amount of compensation at $52.2 million, the highest paid CEO in 2009.  He owns shares valued at $665,107,780 and, according to Forbes, had total compensation of $782.48 million over the previous five years.  We've also noted on this Blog other interesting aspects of Mr. Irani's compensation, particularly the golden coffins and the security expenses.

Shareholders apparently were unhappy with the compensation package and, for the second time (Motorola was first) in the United States, voted down a compensation resolution.  (The resolution provides that "stockholders approve the company's compensation philosophy, ojbectives and policies as described below").   The total vote was 321,676,254 votes for; 365,053,432 votes against; and 5,722,279 abstentions.

Its clear that shareholders disagreed with the compensation package.  It raises questions over the process used by the board in approving the compensation package. 

It is a board that has considerable familiarity with Mr. Irani.  Irani joined the board in 1984. Most of the directors on the board have served with Ray Irani for more than a decade.  The directors on the compensation committee included Spencer Abraham (Chair) (joined the board on 2005); John S. Chalsty (1996); Avedick B. Poladian (2008); Rodolfo Segovia (1994); and Rosemary Tomich (1980).  In short, it is a board that raises concerns over structural bias. 

 It is one of the reasons why numerous countries (including the United Kingdom) provide that longstanding service on the board deprives a directors of his/her independence.  See Article A.3.1 of the Combined Code (director not independent who "has served on the board for more than nine years from the date of their first election.").  Had Occidental been incorporated in Britain and complying with the Combined Code, the compensation committee would not have been considered independent.   

But putting aside the number of years of service, these directors are well paid (see below, several more than $500,000 a year).  And for how much work?  According to the Proxy Statement:  "The Board of Directors held six regular meetings during 2009, including one executive session at which no members of management were present. Mr. Syriani, the Lead Independent Director, presided over the executive session."   Its not the first time that we've noted the high amounts paid to directors at Occidental.

As we have stated often on this Blog, directors have an economic incentive to appease the CEO.  While Occidental does have a Pfizer style governance provision that requires a resignation of any director who "receives a greater number of votes 'against' his or her election than votes 'for' in any election," these provisions are ineffective and a myth (directors have the discretion to decline the resignation and, so far, have done so).  In other words, the only way not to be reelected is to be dropped by the nomination committee of the board.  The best way to do that is to disrupt the typical harmony of the board by opposing the CEO.  

Advisory votes are fine but the only way to ensure the integrity of the compensation process is to make directors more accountable to shareholders.  The only way to do that is to increase the likelihood that directors who do not act in the best interests of shareholders will be voted out of office.  Majority vote provisions will not accomplish this, but allowing shareholders to elect directors that they nominate will.  In short, access more than advisory votes is what is needed. 

Compensation of Directors
Name		Fees Earned or Paid in Cash ($)				Stock Awards ($) (1)				All Other Compensation ($) (2)				Total ($)
Spencer Abraham		$	102,000			$	304,500			$	1,224			$	407,724
Ronald W. Burkle		$	74,000			$	304,500			$	50,000			$	428,500
John S. Chalsty		$	114,000			$	353,220			$	31,429			$	498,649
Edward P. Djerejian		$	104,000			$	304,500			$	5,861			$	414,361
John E. Feick		$	102,000			$	304,500			$	5,449			$	411,949
Carlos M. Gutierrez (3)		$	33,581			$	225,879			$	0			$	259,460
Irvin W. Maloney		$	102,000			$	304,500			$	1,310			$	407,810
Avedick B. Poladian		$	96,000			$	304,500			$	0			$	400,500
Rodolfo Segovia		$	116,000			$	353,220			$	40,405			$	509,625
Aziz D. Syriani		$	102,000			$	401,940			$	9,370			$	513,310
Rosemary Tomich		$	130,000			$	401,940			$	0			$	531,940
Walter L. Weisman		$	114,000			$	304,500			$	25,000			$	443,500

(1)	Restricted Stock Awards are granted to each non-employee director on the first business day following the Annual Meeting or, in the case of a new non-employee director, the first busine