Shareholders Focus on Pay Practices

Activist shareholders are calling on several large companies to focus on issues such as the pay gender gap and employee motivation.

Tuesday, March 17, 2015
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Some of the furor roiling the nation over income inequality and pay discrepancies between men and women is now spilling into corporate boardrooms.

Three large companies-Walmart, ExxonMobil and eBay-have been hit with shareholder proposals calling on them to publicly disclose any pay discrepancies between male and female employees. Two other shareholder proposals-both aimed at Walmart-call for linking executive pay to "staff motivation" and for disclosing the ratio of executive pay to the median pay of its store employees. 

The staff motivation proposal, presented by Connecticut State Treasurer Denise Nappier, would require creating a new metric for the executive-compensation committee at Walmart that would link executives' pay to the happiness and productivity of the company's workers.

Nappier, who oversees $40 million worth of Walmart shares on behalf of the state, says the metric would define staff motivation as the extent to which workers "apply discretionary effort to accomplish organizational goals." The proposal would require Walmart's compensation committee to use outside experts to measure it, Nappier told Reuters.

All three companies-Walmart, ExxonMobil and eBay-have asked the Securities and Exchange Commission for permission to exclude the proposals from discussion during their annual shareholder meetings. In Walmart's case, the company's legal team says it relates to "ordinary business" matters and therefore meets the SEC's criteria for exclusion, according to Reuters. They also say that Walmart already has measures in place-including its recent move to boost the hourly pay of its workers-designed to increase employee engagement.

A group of Catholic nuns has also presented a proposal that calls on the retailer to disclose the ratio of top executive pay to the median pay of store employees and provide explanations for changes in that gap over time.

Shareholder activism of this nature is not going away anytime soon: A report published late last year by New York-based law firm Schulte Roth & Zabel finds that 98 percent of U.S. corporate executives and activist investors expect an increase in shareholder activism during the next 12 to 24 months and almost half (48 percent) expect it to be significant.

When asked which specific investor groups they expect to drive activity during the next 12 months, 24 percent of respondents cited unions, which ranked second only to hedge funds (cited by 60 percent). 

Walmart tends to find itself in the crosshairs of shareholder activists more frequently than other companies: According to data from Institutional Shareholder Services, of the approximately 350 proposals that appeared on U.S. shareholder ballots during the past decade related to human capital management, Walmart had 16-more than any other company.

Walmart spokesman Randy Hargrove told Reuters that the company only seeks to exclude proposals that it believes don't meet SEC guidelines or involve topics better left to management or the board. "Shareholders have varying views and they are important and we take them into consideration," he said.

Shareholder activists often cite a company's pay practices as indicative of bigger problems within the organization that need to be rectified, says Doug Friske, global head of executive compensation consulting at Towers Watson. He has not heard of a similar resolution at other companies.

"They're typically looking to make broad management changes," he says.

Although the $40 million worth of Walmart shares controlled by Nappier represents a tiny fraction of the $265-billion company, that doesn't mean its HR leaders should take her proposal any less seriously than one from a major shareholder, says Friske.

"Most HR people would take any input from shareholders seriously, regardless of their size, and I expect Walmart will do the same," he says.

Friske spends a lot of time with corporate clients helping them take a proactive approach, so the company won't be put on the defensive by shareholder activists over its pay practices.

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"From an HR perspective, companies are trying to get ahead of the curve on this by ensuring there's a clearly defined and articulated point of view on certain pay practices," he says.

This should include having a clear understanding of how the company links pay to performance and being aware of any anomalies, such as payouts, that seemed excessive relative to performance, he says.

"Activists will use pay as a lever to get other things," says Friske.

At eBay, activist shareholders hope to pressure it into being a role model for other Silicon Valley technology companies.

Natasha Lamb, director of equity research and shareholder engagement for Arjuna Capital, an investment firm that describes its strategy as supporting environmentally sustainable and socially equitable enterprises, told the Washington Post that her firm presented its proposal to eBay because the company appears to take diversity more seriously than its Silicon Valley peers.

"[EBay is] a company that's working on gender equality issues, and they have an opportunity to address this even larger issue of gender pay equality," she said. The "issue is endemic to Silicon Valley and eBay has the opportunity to be a leader."

However, Alan Johnson, managing director of compensation-consulting firm Johnson Associates, told HRE Daily that the proposal targeting eBay is "a big, expensive distraction.

"In terms of eBay, the assumption is being made that the jobs are the same, but the reality is that that may not be the case," he said. "EBay, for instance, may have a big call center staffed by females. If that's true, it would skew all the numbers."

The proposal could ultimately "do a lot of harm" by encouraging employers such as eBay to offshore jobs or hire part-time workers, said Johnson.

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