Shareholders don't often vote against huge CEO pay

— -- Irate Citigroup shareholders slapped down CEO Vikram Pandit's proposed $15 million pay package this week. Is this the start of a trend in which millions of investors rise up against outrageous pay for middling — or worse — executives?

Probably not.

Of the 200 or so proxy votes completed this year, only four received a majority negative vote on executive compensation, says pay analysis firm Compensia. Last year, 41 companies in the Russell 3000 index voted down executive pay packages.

But the Citigroup situation may signal that investors, particularly large institutional investors, are starting to look at pay a bit more carefully as they evaluate a stock. The Citigroup vote wasn't preceded by a big campaign by activist investors. And it may — just may — mean that CEOs can no longer automatically assume that they'll rake in millions even if the company fares badly.

CEO pay might be a hot button with the masses. But when it comes down to investors actually making a statement, it's very rare.

Investors have had the right to vote on executive pay plans for two years, thanks to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. However, the votes are non-binding, meaning a board of directors can simply ignore the vote and proceed with the executive's pay package.

Last proxy season, the first year investors were able to vote on pay plans, 43 plans out of 3,100 analyzed were voted down, says Mark Borges, principal at Compensia. Only a few hundred plans received less than 80% support, he says.

It's much too early in the current proxy season to know how many plans will be voted down by shareholders. About 200 companies have held meetings and disclosed the results of the shareholder votes, Borges says. Most of the meetings are held from late April through June. "It's a little early to know," he says. But "if shareholders had problems with compensation, that would have been reflected in last year's vote."

It's unlikely investors at many companies will follow the lead of those at Citigroup and vote down executive pay plans this proxy season, Borges says.

A special case?

Shareholders' disapproval of Citigroup's plan is more the exception than the rule. Just three other companies, International Game Technology, Actuant and KB Home, have had executive pay plans voted down this year, Borges says.

By Wall Street standards, $15 million isn't egregious. But Citigroup is a classic example of a raise that attracts attention, says Eleanor Bloxham, CEO of the Value Alliance. Pandit saw his pay jump to $14.9 million in 2011 up from $1 in 2010 and $128,751 in 2009, according to the company's proxy statement. Meanwhile, the company, which has paid a 1-cent-a-share quarterly dividend since 2011, may hold off on boosting the dividend until providing a 2013 capital plan to the Federal Reserve. At Wednesday's close of $35.08, the stock's annual dividend yield is 0.1%.

Investors are saying, "We didn't get paid. Why should you?" Bloxham says. Meanwhile, Citigroup's profit targets, which were used as a basis to set executive pay, were too low and easy to top, she says.

Also, Citigroup's turnaround has not been a huge success. "This is a company that's still struggling," says Timothy Smith, senior vice president of Walden Asset Management. "It seemed outsized and inadequately related to performance."

The Calvert Group, a socially conscious fund group, is among the shareholders that voted against the Citigroup pay package. One reason: a $5 million bonus awarded to Pandit that's not tied to anything specific, says Stu Dalheim, Calvert's vice president of shareholder advocacy. Although boards often want the ability to exercise their own discretion, too much leeway can lead to abuse, he says.

In a statement late Tuesday, Citigroup said its board and senior management will consult with "representative shareholders" to hear their concerns. The board's compensation committee "will carefully consider their input as we move forward," the Citigroup statement said.

Closer looks

Nevertheless, say-on-pay votes may prompt investors to more closely examine executive pay. The majority of shareholders of most companies are large institutional investors, such as mutual funds and pensions, and few are noted for outrage on executive compensation.

Companies are also making sure that their points of view on executive pay packages are being heard, Smith says. "It's a different period from five years ago, where you had a few cranky investors who didn't like the pay package. The company now has to engage shareholders."

Mark Schlegel, co-founder of Moxy Vote, which helps investors place proxy votes, says companies have been actively talking to their shareholders about their pay packages the past 12 months, making changes where needed, to ensure their plans will pass. "Companies are laser-focused on getting the approval," he says. Investors are "expressing anger, but over the past year, there's been dialogue, and companies are changing."

That may be working. Many plans that were at risk of failure, or failed in 2011, resulted in boards revisiting them to make sure they'll pass this year. Four companies that had plans voted down last year — Jacobs Engineering, Beazer Homes, Shuffle Master and Hewlett-Packard — have already gotten them passed in the 2012 proxy season, Borges says.

In addition, CEOs had more muted raises in 2011 than in recent years. CEO pay in 2011 rose 2% to a median $9.6 million, based on 138 Standard & Poor's 500 companies that were analyzed in the USA TODAY analysis using data from GMI Ratings. That was well below the double-digit percentage raises CEOs have gotten in years past.

Plenty of outrage left

Still, some shareholders may use 2012 as their chance to express discontent. Mutual fund company Janus Capital, for instance, saw its executive compensation plan fail to pass last year, and influential proxy voting adviser Institutional Shareholder Services has given the plan a negative assessment again this year, Borges says. The Janus vote has yet to be held.

Adam Kanzer, managing director and general counsel for Domini Investments, an investment firm that evaluates its holdings for social criteria, says the company votes against any CEO package of more than $10 million. "There's a point at which the pay package is so large that it distorts priorities and decision-making," Kanzer says.

The company also plans to start voting against outside CEOs who sit on compensation committees. The temptation to vote for another CEO's package could be too tempting, Kanzer says.

The biggest lesson from the Citigroup vote: "It shows that investors do have impact," Kanzer says. "If Citi ignores this, they will be hit with some very serious votes next year," he says.