CEOs Serving on Compensation Committees

2010 – Honeywell International Inc.

 

 

RESOLVED:  The shareholders of Honeywell International Inc. (the “Company”) request that the Board of Directors (“Board”) adopt a policy prohibiting any active or retired chief executive officers (“CEOs”) from serving on the Board’s Compensation Committee.  The policy shall be implemented so that it does not affect the unexpired terms of previously elected directors.

 

Supporting Statement: It is a well-established tenet of corporate governance that a compensation committee must be independent of management to ensure fair and impartial negotiations of pay with individual executives. Indeed, this principle is reflected in the listing standards of the major stock exchanges.

 

We do not dispute that CEOs can be valuable members of other Board committees.  Nonetheless, we believe that shareholder concerns about aligning CEO pay with performance argue strongly in favor of directors who can view senior executive compensation issues objectively.  We are particularly concerned about CEOs on the compensation committee because of their potential conflicts of interest in setting the compensation of peers.

     

It is axiomatic that CEOs who benefit from generous pay will view large compensation packages as necessary to retain and motivate other executives.  Those who benefit from stock option plans will view them as an efficient form of compensation; those who receive generous “golden parachutes” will regard them as a key element of a compensation package.  Consequently, we are concerned that the inclusion of CEOs on the compensation committee may result in more generous pay packages for senior executives than that necessary to attract and retain talent.  Our concern is most acute at companies where the chairman of the Board is also the CEO.

     

In their 2004 book “Pay Without Performance,” Lucian Bebchuk and Jesse Fried cite an academic study by Brian Main, Charles O’Reilly and James Wade that found a significant association between the compensation level of outsiders on the compensation committee and CEO pay.

     

“There are still plenty of CEOs who sit on compensation committees at other companies,” said Carol Bowie, a corporate governance expert at RiskMetrics Group.  “They don’t have an interest in seeing CEO pay go down.”  (Crain’s Chicago Business, May 26, 2008.)

 

Graef Crystal concurs.  “My own research of CEOs who sit on compensation committees shows that the most highly paid executives award the fattest packages to the CEOs whose pay they regulate.  Here’s an even better idea:  bar CEOs from serving on the comp committee.”  (Bloomberg News column, June 22, 2009.)

     

Moreover, CEOs “indirectly benefit from one another’s pay increases because compensation packages are often based on surveys detailing what their peers are earning.”  (The New York Times, May 24, 2006.)

     

At our Company, Chairman and CEO David Cote received a 32% pay increase in 2008 to $30.8 million, including the grant date fair value of equity-based awards, despite the Company’s poor performance, both in absolute terms and relative to peers.  Three of the four directors on the Management Development and Compensation Committee are retired CEOs. 

 

We urge you to vote FOR this proposal.