WaMu and Executive Compensation

As the WSJ reported yesterday, WaMu held its annual meeting.  WaMu was a company subject to a withhold campaign primarily because of the board's decision to ignore the subprime problems in setting compensation.  The meeting resulted in two surprise announcements.  One concerned the resignation of a directors.  As the WSJ reported:  

• Mary E. Pugh, criticized by some shareholders, resigned from the 13-member board, Mr. Killinger announced at the Seattle company's meeting. He didn't give a reason for her departure. But as head of the board's finance committee, she was taken to task by some shareholders who claimed she failed to shield the company from exposure to risky mortgages that have left the company with punishing losses.

Pugh had been one of the directors targeted in connection with the withhold campaign.  The article noted that "informal preliminary tallies suggested her candidacy hadn't been successful."  In other words, it was probably the success of the withhold campaign that forced the resignation.  

Second, the company announced that "credit-related targets" would be a factor in determining bonuses.  In other words, shareholder sentiment influenced the compensation formula.  This action shows the benefit of shareholder participation in the compensation process through voluntary mechanisms such as say on pay.  Where shareholders have an opportunity to collectively announce opposition to a compensation decision or practice, management will often need to act and reform the process.  Say on pay provides this type of opportunity. 

Comments

[m. hodak]

"Where shareholders have an opportunity to collectively announce opposition to a compensation decision or practice, management will often need to act and reform the process. Say on pay provides this type of opportunity."

The first statement is certainly true, but the second doesn't follow. It's possible to get this opportunity, as the WaMu case and others show, without Say on Pay. Say on Pay itself does not provide this type of opportunity for directors to register specific objections to a pay package and negotiate around it--it only mandates and all-or-nothing vote.

In many cases the threat of such a vote would likely prompt useful discussions between shareholder groups and management, like what happened at WaMu. But in other cases, this threat would lead to potentially unproductive discussions, as we have seen with many religious and union funds, whose objections to compensation are not based on governance problems as you or I might see them, but are on broader social criticisms about the raw level of pay. If Say on Pay could distinguish shareholder versus social criticisms of pay, I would be OK with it, but it doesn't. It simply opens up every company, whether it has a governance-related compensation issue or not, to the costs of placating the loudest shareholders, regardless of their agenda.