Irani, the 52-million-dollar man

IT IS too soon to call it a trend, but the fact that America's normally passive shareholders have voted against executive pay packages at two big companies within a week suggests that something is going on. The 54% of votes cast against the remuneration of Sanjay Jha, Motorola's chief executive, at the phonemaker's annual meeting on May 3rd, marked the first time that American shareholders had ever rejected a boss's pay. Four days later they did it again, voting against the wages of Ray Irani, boss of Occidental Petroleum.

Such expressions of discontent are unprecedented in America, not least because until recently no one bothered to ask shareholders to approve executive pay. Last year was the first time a significant number of American firms gave shareholders a “say on pay”, although the votes are usually not binding, and many of the firms that have adopted them were forced to do so as a condition of a government bail-out. This year around 300 big companies are giving shareholders a vote. If certain proposals in the financial-reform bill now before Congress become law, say on pay will become the norm for American public companies, as it already is in Britain.

In 2003 Jean-Pierre Garnier, the chief executive at the time of GlaxoSmithKline, became the first boss to lose a shareholder vote under the say-on-pay rules adopted in Britain a year earlier. The first two Americans to suffer the indignity of defeat made obvious targets. The $52.2m that Occidental paid Mr Irani for his services in 2009 not only made him the highest-paid boss at America's 200 biggest firms; it also made him one of the most overpaid, once the performance of his firm's shares is taken into account. Graef Crystal, a veteran analyst of undeserved executive pay, had singled out Mr Irani's package for criticism on the grounds that the payment was in cash and that Mr Irani's performance targets had been lowered.

As for Mr Jha, Motorola's board seems to have ignored the shot fired across its bow by shareholders last year, when over one-third of them opposed his pay package. The board's decision to give him a stake of up to 3% in the company he will run if Motorola is split in two, or a guaranteed payment if the planned break-up does not happen by June 2011, seems to have provoked the No vote.

One test of the significance of the two reversals will be how the boards of Motorola and Occidental respond. So far they have only issued boilerplate comments, promising to engage with shareholders “to get a better understanding of any specific concerns they may have” (Motorola) and to use their input to “re-evaluate the company's compensation philosophy, objectives and policies” (Occidental).

Another test will be how widespread shareholder activism on pay becomes. Saying no to the greediest outliers may have little impact on remuneration at the average firm. “I'd have liked to see more No votes at other companies,” says Nell Minow of the Corporate Library, which conducts research on corporate governance. She had expected pay at firms bailed out by the government to come under close scrutiny from shareholders, but so far that particular dog has failed to bark.

In Britain, No votes have remained a rarity since shareholders snubbed Mr Garnier. Indeed, it was not until last year that another pay package got a majority of No votes—that of Royal Dutch Shell's senior executives. However, activists argue that the right to vote on pay has led to far more consultation of shareholders by boards seeking to ensure that pay packages will not be controversial.

Lucian Bebchuk of Harvard Law School argues that shareholder rights in general are less strong in America than Britain, “so there may be less pressure on boards to react to signals sent by shareholders.” It is much harder for American shareholders, for example, to force out recalcitrant directors. So much will depend on two other reforms currently under consideration in Congress. The first would require would-be directors to win a majority of votes cast to secure seats on a board. At present at many American firms, directors can be elected despite overwhelming opposition if no other candidates win more votes—something that is quite common because it is hard to get onto the ballot in the first place. For that reason, the second reform would make it easier for shareholders to nominate candidates.

Thus empowered, shareholders should be able to sling off the board members of compensation committees who ignore their advice on pay. In particular, they would be likely to target the chair of the compensation committee—people such as Spencer Abraham, a former energy secretary and senator who holds the position at Occidental, and Samuel Scott, a former boss of Corn Products International, at Motorola—who are arguably more to blame for excessive pay packages than the bosses who receive them.