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Institutional Investors Seeking to Cut Wall Street Bonuses

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Proxy season – the time of year when corporations hold their annual shareholder meetings – is almost upon us, and this year, things promise to get interesting for the financial sector.
 
Traditionally, these annual meetings are routine affairs where shareholders get informed about and vote on issues like the election of the company’s directors. However, in the wake of the 2008 financial crisis, there’s been a rise in shareholder activism, where take-charge investors have called for reform in, among other things, executive compensation and environmental policies.
 
After a relatively dismal 2011 for financial stocks, it looks like institutional investors like charitable foundations and big state pension funds are planning to once again shake things up at the shareholder meetings by questioning the pay practices of large banks.
 
Already, firms like Goldman Sachs (GS), Morgan Stanley (MS), Credit Suisse (CS) and Dow Jones (^DJI) component Bank of America (BAC) have planned massive cuts to 2011 bonuses. However, that might not be sufficient for investors, as the Wall Street Journal reports.

In December, the Nathan Cummings Foundation—a private charitable organization and institutional shareholder—filed proposals asking that directors at Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. address potential reputational damage that big pay packages could bring to the banks, said Laura Campos, director of shareholder activities at the foundation. The proposals also request that they study how such awards could reduce banks' ability to spend money on other areas, and report those findings to shareholders.
 
Another new proposal, filed by the New York City pension funds—which had $115 billion in assets under management as of Oct. 31—called on directors at the two firms and Morgan Stanley to impose tougher clawbacks on executives who act improperly.

Already, because of Dodd-Frank regulatory changes, firms have to put executive compensation to a shareholder vote at least once every three years. Last year, six banks – Bank of America, JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC), Goldman and Morgan Stanley – announced plans to hold votes annually.
 
Also, unlike previous years, it will not be so easy for banks to get their pay packages approved this year, because Institutional Shareholder Services, or ISS, to whom many investors turn for advice, has adjusted its recommendations on how to evaluate executive pay, according to Law.com.

Compensation plans need a 50 percent approval vote to officially pass muster, but, among the new ISS recommendations, the bar for scrutiny is now set a little higher. "If a company got 70 percent or less last year, there's going to be more focus on the disclosure this year for that say-on-pay vote," [Maureen Errity, director of Deloitte LLP's Center for Corporate Governance,] explains. The ISS policy is asking for more disclosure about engagement efforts with significant investors, as well as, for example, other compensation changes or action taken by the company since the last proxy vote.
 
A bank executive interviewed by the Journal said that company boards are unlikely to change their compensation plans even if they do not get the suggested 70% shareholder support. They might, however, “tread carefully” on salaries the next year.
 
According to consultants, leading financial firms will reduce executive compensation by about 30% from 2010 levels.
 
(See also: Are Wall Street's Massive Pay Cuts Fair? & Cantor Fitzgerald Announces Ambitious Hiring Plans, Poised to Poach Bankers Disgruntled Over Salary Cuts)
POSITION:  No positions in stocks mentioned.

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