This week, many national headlines describe an issue that has long engaged the social investment community. President Obama has announced new limits on the pay of bank executives “just days before” another round of Federal investment in banks, reports the New York Times. His announcement follows news of Merrill Lynch rushing big bonuses to its executives, even as bailout recipient Bank of America took over the failed brokerage.

In his Feb. 5 comments, the President said that “what gets people upset — and rightfully so — are executives being rewarded for failure. Especially when those rewards are subsidized by U.S. taxpayers.”

Investors Want Pay for (ESG) Performance

Shareholders shouldn’t subsidize failure, either. Long before the current crisis, investors have pushed for a bigger voice in determining executive compensation. The Christian Science Monitor’s Laurent Belsie, in a story comparing CEOs’ millions to those earned by NFL stars, explains why shareholders – even more than Presidents – are the key to reform:

“Star athletes are rewarded by the marketplace; CEOs are rewarded by their peers.”

“Peers,” in this case, refers to corporate boards (often staffed by other CEOs) that have typically done little to restrain executive compensation. Due to both the economic climate and the determined efforts of major shareholders, this may be changing.

Companies like Intel and HP have already agreed to endorse “say on pay” resolutions in recent months, writes Robert Kropp at Social Funds. Mr. Kropp has tracked these and other shareholder campaigns, and his reporting provides a valuable overview of the broader “say on pay” campaign. He writes that the Interfaith Center on Corporate Responsibility (ICCR), in an effort organized by the American Federation of State, County and Municipal Employees (AFSCME) and Walden Asset Management, intends to request a non-binding advisory vote on executive compensation at over 100 US corporations in 2009.

It is important to note that for ICCR and its allies, performance is not only measured with quarterly financials. A firm like Walden considers corporations’ environmental, social and governance (ESG) practices as part of its investment strategy, which means that “say on pay” resolutions could lead to broader discussions of how American executives manage their companies. (By comparison, many European nations have stronger “say on pay” policies. See this report from Swiss foundation Ethos to learn more.)

Some Pay Cuts are More Equal than Others

Perhaps seeking to forestall more active engagement by shareholders, some companies have already moved to rein in executive salaries. FedEx, for example, has cut salaries to “minimize job loss” while reducing costs, according to Steven Taub at CFO.com. FedEx CEO Fred Smith will face a 20% salary reduction, while rank-and-file salaries will be cut 5%.

While this is welcome news, KLD Analyst Eric Benjamin points out that the pay structure at FedEx, like that at many American companies, remains severely unbalanced:

“In 2008, FedEx reported in their proxy statement a CEO pay package worth $10,940,253. Next year the CEO’s total pay could still exceed $10 million, because the 20% reduction is in base salary, not total compensation. Base salary made up 13% of Fred Smith’s compensation in 2008. Compensation committees have historically offset salary reductions with increases in other components of pay, such as restricted stock. This is still possible under the President’s new guidelines, which also only apply to banks receiving federal bailout money.”

Eric, who in 2006 co-authored United for a Fair Economy’s annual report on pay inequality, Executive Excess, puts this in perspective:

“$10 million is almost 500 times the average worker’s earnings in FedEx’s industry in 2007. Workers in the courier industry earned an average of $21,000 in 2007, according to the Bureau of Labor Statistics. A further 5% salary cut would bring this down to about $19,950.”

Clearly, all salary cuts are not created equal. Laurent Belsie noted that last year’s “say on pay” proxy resolutions attracted support from 43% of voters. As unemployment climbs, inequity persists, and more shareholders seek answers, that number is sure to increase in 2009.