Limit executive pay to calm investors

Annual shareholder meetings are a hoot. Though they start out like analyst earnings calls (financial reports, strategic overviews, etc.), things really heat up in the Q&A sessions. Analysts on an earnings call, even when disdainful of the company or its management, almost always remain respectful when questioning officers, careful not to mar their relationship with a company they cover. But when shareholders step to the mike, it's no holds barred.

At Nortel Networks' last annual meeting, investors harangued its directors over the company's accounting problems. “We feel totally abused,” one cried. At Lucent Technologies' last meeting, retirees accused the company of moral decay. CEO Pat Russo in particular was excoriated for earning millions annually while the company's stock sagged below $3, and retirees lost their benefits. One shareholder called her incompetent and greedy. “You must feel a little like a piñata today, as you get battered around,” another shareholder said.

A lot of the criticism is typically directed toward executive compensation issues: Why did the CEO get a multimillion-dollar bonus when I'm losing money on the stock?

This is not necessarily productive in all cases. At Lucent's last meeting, for example, one shareholder called Lucent's directors “all dumbbells,” arguing that, if they had done their jobs right, the stock would be at its bubble prices of $80 or $100 per share. (Not likely.) She also complained that she'd driven a long way to attend the shareholder meeting and had to stay at a hotel that — no kidding — caught fire. Pat Russo is responsible for that?!

A lot of this anger, no doubt, comes from a feeling of helplessness among shareholders, an inability to affect the policies of the companies they support. Despite skyrocketing CEO salaries and bonuses (according to Business Week, executives earned, on average, 400 times what the average employee did in 2004), shareholder proposals to limit executive pay almost always seem to fail. That's why it was interesting to see Lucent investors manage to pass two proposals limiting executive pay at the company's last annual meeting. One tied 75% of executives' equity compensation to openly disclosed performance metrics. The other prohibited the company from including pension credits in calculations of company performance for executive pay purposes.

The measures aren't likely to completely satisfy Lucent retirees, who pushed for the proposals after watching their benefits erode. But it will be interesting to see if the anger among its overall shareholders abates now that they have successfully exercised an outlet for their concerns. My guess is that if more shareholders were able to pass resolutions limiting executive pay, they would be a lot more friendly at the microphone.