The shift to stock awards is at least partly rooted in what is known as the Dodd-Frank law, passed in the wake of the financial crisis, which overhauled how banks and other public companies are regulated.
Beginning last year, Dodd-Frank required public companies to let shareholders vote on whether they approve of the top executives' pay packages. The votes are advisory, so companies don't have to take back even a penny if shareholders give them the thumbs-down. But shame has proved a powerful motivator.
It got Hewlett-Packard to change its ways. After an embarrassing "no" vote last year on the 2010 pay packages, including nearly $24 million for ousted CEO Mark Hurd, the company huddled with more than 200 investment firms and major shareholders, then threw out its old pay formula. New CEO Meg Whitman is getting $1 a year in salary and no guaranteed bonus for 2011. Nearly all her pay is in stock options that could be worth $16 million, but only if the share price goes up.
Other companies took notice, too. Last year, shareholders rejected the CEO pay packages at Janus Capital, homebuilder Beazer Homes and construction company Jacobs Engineering Group. All won approval this year after the companies made the packages more palatable to shareholders.
To be sure, shareholders aren't voting en masse against executive pay. Instead, they seem to be saving "no" votes for the executives they deem most egregious.
Of more than 3,000 U.S. companies that held votes in 2011, only 43 got rejections, according to ISS. But the mere presence of the "say on pay" vote is triggering change, shareholder activists say.
"Companies that have gone through that trial by fire don't want to go through it again," says McGurn, the ISS special counsel.
Even Chesapeake Energy, a company perennially in the cross-hairs of corporate-governance activists, is bowing to pressure. The company has drawn fire for showering CEO Aubrey McClendon with assorted goodies. In addition to handing him big pay packages — $17.9 million for 2011 — Chesapeake in recent years has spent millions sponsoring the NBA's Oklahoma City Thunder, which he partially owns, paying him for his collection of antique maps and letting him buy stakes in company wells.
Last year, shareholders of the natural gas producer passed the proposed 2010 pay package but by a low margin, 58 percent. This year, with shareholder pressure mounting, the board has ended some of McClendon's perks and stripped him of his title as chairman. A lawsuit settlement is forcing him to buy back his $12 million worth of maps.
After losing the chairman job, McClendon issued a statement saying the demotion "reflects our determination to uphold strong corporate governance standards." Chesapeake will seek shareholder approval for McClendon's 2011 pay at its annual meeting in June.
So far, Citigroup is the highest-profile company to have its pay package rejected this year. The bank planned to pay CEO Vikram Pandit about $15 million for his work last year, noting that he had returned the company to profitability in 2010 and worked for $1 that year. Shareholders, who watched the stock price plunge 44 percent in 2011 (after adjusting for a reverse stock split) weren't so forgiving.
It's usually around January that boards decide how much to pay a CEO for the previous year. Then they inform shareholders and ask for their vote in the spring — usually after the cash portion has already been handed out. For Pandit, that meant he had already received $7 million in salary and cash bonus by the time shareholders voted against his pay.
In a statement, Citi said it took the vote seriously and planned to "carefully consider" the input of major shareholders. It hasn't given more specifics. Richard Parsons, who retired as Citi's chairman after the April annual meeting, as previously planned, said after the vote that the board should have done a better job explaining to shareholders how it determined CEO pay.