The plan calls for CalPERS to publicly scrutinize companies with the worst and best trends in executive compensation, and outlines a model executive compensation policy statement for companies to use as a blueprint to develop their own policy.
It also unveils specific areas where CalPERS will vote its shares against compensation issues.
"Poorly designed compensation packages are having a disastrous impact on companies and shareowners by emphasizing short-term or self interested behavior," said Sean Harrigan, President of CalPERS Board of Administration. "This plan will help curb the abusive practices by aligning corporate management with its owners and enhancing long-term superior performance."
Under the plan, CalPERS will identify 10-15 companies with bad and good compensation practices using an analysis tool that compares CEO compensation to its corporate peers and the performance of the company versus its peers.
The analysis takes into account total CEO compensation as well as base salary, incentive plans, restricted stock, options, and other compensation factors.
"Executives should not be handsomely paid for simply keeping a seat warm," said Rob Feckner, Chair of CalPERS Investment Committee. "Compensation programs need to be performance based where high compensation is justified by high performance and low performance results in lower compensation."
CalPERS analysis will be used to decide how CalPERS will vote its proxies on compensation issues and to highlight poor and good compensation practices on the pension fund's web site.
In addition to the analysis, CalPERS will vote against any compensation plan that does not prohibit repricing, include a significant portion of performance-based components and vesting periods of at least four years for a significant portion of overall grants.
The System also plans to vote against compensation plans that contain evergreen provisions that automatically increase the shares available for grants on an annual basis, and those that provide reload options allowing an optionee who exercises a stock option using stock already owned to receive new options for the same number of shares used.
"These actions are in effort to gain greater oversight of executive compensation programs," added Harrigan. "Companies need to look long and hard at their compensation, develop their own internal policies, as well as seek shareowner approval."
CalPERS model executive compensation policy encourages companies to design programs that provide alignment of interests with shareowners and include a combination of cash and equity-based compensation.
The pension fund also wants programs to be transparent and fully disclosed. Plans should include the parameters of the employment contract provisions, severance packages, and the overall compensation philosophy.
CalPERS expects to fully implement its plan by Fall 2003 and will use it to vote its shares in the 2004 proxy season.
A copy of CalPERS Executive Compensation Plan can be found on its web site at www.calpers.ca.gov, click CalPERS Board Meeting Information, then Investment Committee, then item 7C.
CalPERS is the nation's largest public pension fund with assets of $138 billion. The System provides retirement and health benefits to 1.3 million State and local public employees an their families.