Bristol-Myers Squibb Adopts My CEO Pay Proposal

Editor’s Note: This post is by Lucian Bebchuk of Harvard Law School.

Last week, Bristol-Myers Squibb followed Home Depot to become the second company to reform its pay-setting process on the basis of shareholder proposals I submitted.  Last fall I submitted to Bristol-Myers Squibb a shareholder proposal to adopt a bylaw provision requiring that decisions about the CEO’s compensation be ratified by three-quarters of the company’s independent directors.  The text of the proposal and an accompanying supporting statement are available here

The company initially sought to exclude the proposal from the ballot, and I filed with the SEC a letter opposing the company’s request for a no-action letter.  Subsequently, however, the company and I reached an understanding under which the company agreed to adopt the proposed arrangement as a corporate governance guideline and I agreed to withdraw the proposal.

Last week the company’s Board of Directors approved the revision of the company’s corporate governance guidelines, which now state the following: “The Chief Executive Officer’s compensation must be approved by at least three-fourths of all the independent directors of the Board.”  In addition, the Board approved corresponding language changes in the charter of the Compensation and Management Development Committee.  Both the Corporate Governance Guidelines and the Compensation and Management Development Committee Charter are available on the company’s website here.

Earlier on, following my submission of a proposal to Home Depot, Home Depot and I reached an understanding under which the company amended its bylaws to implement the proposed arrangement and I withdrew my proposal.

I submitted a similar proposal to ExxonMobil, and another similar proposal to AIG.  Both companies held discussions with me about the proposed arrangement but did not agree to implement it, and the proposals are expected to be voted on at the companies’ coming annual meetings. 

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One Comment

  1. Peter Klein
    Posted Wednesday, March 14, 2007 at 5:27 pm | Permalink

    BM-S’s decision by its Board (above) to me is ‘annoying to feed Mr. Bebchuk’s ego’ but does NOT, to me, look like any type of real concession of any significance…
    at least not at most large public companies!

    CEO comp, in my experience, is always agreed upon by the entire board after very thorough Committee (and outsider) analyses and benchmarking, etc. – usually without any dissent. Although there may be some companies where this 3/4 requirement could represent a change or create an issue, I think that would be the unusual case. The fact that Mr. Bebchuk appears to be campaigning for this could be viewed as showing how little he knows about how CEO comp is (really) agreed upon by Boards today and how Boards really work!

    Separatley, but related, I always liked the below interview from “Armchair M.B.A.” on CEO Comp topic (among hundreds I’ve read over the years).

    Peter Klein
    HBS MBA ’71

    Armchair M.B.A.
    Paying for Performance, but Not Share Price

    (Holstein is editor in chief of Directorship magazine)
    October 8, 2006, NY TIMES

    THE compensation of chief executives should be linked to the wealth they create for shareholders, says Robert W. Lane, the chief of Deere & Company, the farm equipment maker based in Moline, Ill. Here are excerpts from a conversation:

    Q. Are some chief executives overpaid?

    A. It’s possible. What we tried to do, starting in December 2000, was to set up some very high aspirations for improving John Deere’s business, at that time 165 years old. Together with the board and senior management, we said, “It’s been good enough for all these years. We have some strengths,” but Deere had not been known for being a great business. So we set out to create a compensation structure to support that objective and compensate myself and the rest of the senior leadership of the company in a very aligned way.

    Q. According to your proxy, you made about $3.5 million in salary and bonus in 2005, and as much as $7.8 million in stock and options. Is that excessive?

    A. Not in the eyes of our board, which independently determined that the compensation was appropriate in view of the company’s overall performance. Since I became chairman and C.E.O. in August 2000, we have focused on creating economic profit — or the value we have created for shareholders — and, for the last two years, it has more than doubled from its previous high.

    Q. Your company has divided compensation into three segments — short-term, medium-term and long-term compensation incentives, which are linked to criteria like return on assets, as opposed to share price. Using your short-term incentive as an example, how did you carry out this system?

    A. It wasn’t rocket science. Our short-term incentive applies to all salaried employees and it’s all rooted in operating return on operating assets. It’s how we earned on the basis of what we invested. Every employee is rewarded on how well they invested shareholders’ money.

    Q. Most chief executives’ compensation is linked to share price. Is that the wrong criterion?

    A. It could be. Or it could be that it’s not based on long-enough-term results. In our case, the midterm incentive was new to us. It is a payment on the absolute creation of shareholder value. That is based on a sustained four-year performance, and our company has a long history of sometimes doing well for a short period of time and then losing it all. For example, we lost more than $2 billion in shareholder value from 1999 to 2003. That was more than twice what we had earned in the entire 1990’s.

    Now the new program says that if we lose a lot of shareholder value, then we never get the pay, even though it was fully approved. It’s not paid out until we earn it over a rolling four-year period. This helps us think about doing the right thing for the long term.

    Q. If your compensation were at risk of declining, would you go to the board and say: “Keep me whole. Don’t let me get hurt”?

    A. No. First of all, I don’t go to the board and ask them or talk to them about my compensation. I do not know what is presented to the compensation committee in advance. I don’t meet with them. They decide and tell me.

    Q. How has Deere withstood the erosion of Midwest manufacturing?

    A. We made the decision to invest over $100 million in our Waterloo, Iowa, operations, specifically to allow us to dramatically improve the performance of that operation. Otherwise it couldn’t have met the targets we had in mind. I’m talking about bringing down the flow-through, in terms of what is needed to get a tractor completed, from, say, 45 days to 7 days, to cut the amount of space that’s involved in half and to improve the quality. We’ve invested additionally in Davenport and Dubuque, Iowa.

    At the same time, we’ve also broadened our presence around the world. We now own a complete factory in India where we make transmissions, diesel engines and complete tractors, which we sell in India and other parts of the world as well as the United States. We have factories in China that we now own 100 percent of. We’re building a new tractor factory in Brazil right now. We moved diesel engine production from Dubuque down to Mexico. Where we can’t be competitive here, we will move operations, after rigorous analysis, to where we can be competitive.

    Q. Do those investments offshore really support your domestic operations and the overall American standard of living?

    A. The answer unequivocally is yes. We talk about this a lot. Our customers’ standards of living and that of the people in our communities — it’s not just our employees that we talk about, or just our customers, it’s all our communities — their lives are enhanced as global trade improves. The wonderful thing about business is that it is not necessarily a win-lose proposition. It can be win-win. In our case, if we just served people here in this country, we would not be able to do it economically. We wouldn’t deliver the finest in technology.

    Our customers end up exporting a great deal. So by investing worldwide, we improve the lives of people in other parts of the world, which in turn helps us improve our lives. Q. But isn’t it true that on an emotional level, a majority of Americans probably don’t buy that argument?

    A. That may be true. But just take the people who make combine harvesters in East Moline, Ill., or tractors in Waterloo, Iowa. Many of those products are being exported to other parts of the world. They realize how important that is.