Calvert  News & Commentary

Exercising Our Say on Pay

Calvert votes against compensation packages that do not align management and shareholder interests and incent long-term performance.


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Calvert has sharpened its focus on executive compensation and is drawing a harder line in its votes on executive compensation proposals during this year's proxy season. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank), publicly traded companies in the United States are required to give shareholders a "Say on Pay." This means that shareholders have an opportunity to vote on the compensation report for the previous year and let corporate boards and management know whether they believe that the compensation awarded was justified.

Given our concerns about executive compensation, Calvert was among a number of investors that fought for the right to have a say on pay, calling upon individual companies to give shareholders a vote on compensation and making the case to lawmakers in Washington, D.C. prior to the enactment of Dodd Frank. Now that we have this opportunity, Calvert is determined to take advantage of it. In addition to a strict set of voting guidelines on executive compensation, Calvert is writing to key companies to communicate our reasons for voting against their Say on Pay proposals.

Despite the broad public interest in executive compensation, too many investors simply vote along with management endorsing compensation plans that award huge paydays to CEO's even when corporate financial performance is poor or average. Calvert votes against compensation packages that do not align management and shareholder interests and that do not incent the long-term performance of the corporation. During the month of May in 2012, following the establishment of a more restrictive set of guidelines, Calvert voted against company compensation packages 34 percent of the time.

Another piece of Dodd Frank regarding executive compensation is a provision that mandates that public companies disclose the ratio of CEO pay to the median salary of employees. Calvert has advocated for this provision, which will help investors better understand how companies are distributing compensation dollars throughout the firm. Calvert believes that companies that provide excessive compensation to executives may contribute to rising employee dissatisfaction and turnover and lower productivity, and may encourage executives to act in ways that are not in the best long term interest of shareholders. While the final pay ratio rule has not yet been published, we expect it to be sometime this summer. We plan to incorporate this important piece of investor disclosure into our analysis and proxy voting once it becomes available.

Calvert has voted against the compensation package at the following firms (among others):

  • Gilead Sciences Chairman and CEO John Martin earned $15.6 million in 2011. Calvert voted against that compensation package due to the high pay awarded to Mr. Martin in spite of lackluster returns. The company inappropriately benchmarks its executive pay to the pay of larger firms, which distorts the amount of compensation awarded. Using peer group information to determine pay is valuable, but if the company selects an inappropriate peer group it can result in excessive compensation, as is the case here.
  • Safeway where Chairman and CEO Steven Hurd earned $11.5 million in 2011, Calvert opposed the compensation package due to a misalignment between pay and performance. The company's shareholder return during the past 1 and 3 year periods was in the bottom quartile of its peer group, yet its compensation was near the very top of the peer group for the same periods.
  • JPMorgan Chase Chairman and CEO Jamie Dimon earned more than $23 million in 2011. Prior to news of the huge trading loss at JPMorgan, Calvert had determined to vote against this compensation package in large part because the company does not base bonus awards on preset goals but rather gives discretion to the board. This is an opportunity to award compensation that is not justified by the company's performance. In addition, awarding of long term incentive compensation is not tied to meeting specified financial performance hurdles. The weaknesses in risk oversight evident in the massive trading loss that resulted from a failed hedging strategy that the company announced in May of 2012 was further reason for Calvert's vote against the compensation package.
  • Plains Exploration and Production where Chairman, President and CEO James C. Flores earned more than $10 million in 2011. Mr. Flores' pay ranking compared to the company's peer group was in the 91st and 88th percentile for the one and three year periods despite the company's shareholder return being in the 59th and 22nd percentile, respectively, for the same periods.  Plains Exploration and Production shareholders sent a strong message in 2011 when the company's compensation plan received support from only 54.5% of voters. In spite of this message of discontent from nearly half of the company's shareholders, there is still a misalignment between pay and performance and the company.

Calvert Investment Management, Inc., 4550 Montgomery Avenue, Bethesda, MD 20814

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