The California Public Employees' Retirement System board agreed Monday to step up its attack on what it sees as overly generous executive compensation practices.
The CalPERS board, which oversees a $166-billion pension fund, voted unanimously to back a plan to pressure companies to "align compensation practices with shareowner interests." CalPERS said it would urge companies it invests in to curb excessive executive pay, and to base compensation for top officers on company performance.
The plan reflects efforts by some board members of CalPERS, already one the most activist large investors on corporate governance matters, to make executive pay a leading concern for the fund.
"Tackling out-of-control executive pay is job number one in the 2005 proxy season," said California Treasurer Phil Angelides, a CalPERS board member.
The CalPERS plan proposes that the fund select some of the largest companies in its portfolio as targets for reform to influence smaller firms. The plan also proposes taking compensation consultants to task and identifying corporate directors and compensation committee members who approve "poor" executive compensation practices.
Beginning next year, the pension fund would evaluate compensation committees on a number of factors, including whether they approve "excessive" stock-based compensation to top executives. CalPERS could withhold its proxy votes from directors if it determined "shareowner value has been eroded as a result of egregious compensation packages."
"Superior" pay-for-performance practices and companies that significantly improve compensation practices would be recognized.
"We don't want to be just a shrill voice and naysayer," said state Controller Steve Westly, also a CalPERS board member. "Let's focus on some of the firms doing it right."
In addition to backing the activist plan, CalPERS board members voted Monday to add $1 billion to the fund's allocation for investments in hedge funds, bringing it to $2 billion. The funds will be split into direct investments in hedge funds and into hedge funds of funds where a fund manager invests in several hedge funds to spread risk.
The loosely regulated funds, which are usually for wealthy investors and institutions, use aggressive strategies unavailable to mutual funds, such as borrowing, swaps and derivatives.
CalPERS President Sean Harrigan urged fund staff to be cautious, noting that some funds pose high risks.