On Tuesday, an investigation was announced on behalf of the long-term investors of KeyCorp (NYSE:KEY) related to possible violation in fiduciary duty related to the past and future compensation to senior officers of the company. The investigation is expected to make management rethink its compensation packages in question.

 

The inquiry, which was started by a law firm, focuses on claims that certain senior officers of the company were favored with unwarranted or excessive compensation. These officers were given salaries, bonuses, stock options and other forms of long-term ‘incentive’ or retirement compensation that were disproportionate to the company’s performance compared with similar packages offered by peer companies.

 

The law firm is also investigating similar claims about prior compensation packages. The inquest tries to allow stockholders of KeyCorp greater power to influence or control future compensation decisions.

 

In its annual meeting held on May 21, 2010, KeyCorp had received a 55% investor opposition on executive compensation. The company had received an 87.2% approval in the 2009 annual meeting. KeyCorp is the third U.S. company after Motorola Inc. (NYSE:MOT) and Occidental Petroleum Corporation (NYSE:OXY) that failed to get a majority support during a management-sponsored “say on pay” vote.

 

The KeyCorp investigation reflects the disconnection between increasing pay and the company’s lagging financial conditions. In the last fiscal year, KeyCorp’s CEO Henry Meyer III saw a boost of 40.8% in his annual compensation to $8.7 million. For the corresponding period, the company reported a net loss of $1.335 billion. The raise in pay package came from an increase in the value of stock option grants and a large salary stock increase.

 

KeyCorp is the first participant of the U.S. government’s Troubled Asset Relief Program (TARP) to get majority dissent over its pay practices. However, like the other TARP members, the company has moved to salary stock to bypass the limitations on incentive payment.

 

Based in Cleveland, Ohio, KeyCorp is a bank and financial holding company. The company provides a wide range of products and services such as commercial and retail banking, commercial leasing, investment management, consumer finance as well as investment banking products to individual, corporate and institutional clients throughout the United States and, for certain businesses, internationally.

 

KeyCorp’s first quarter loss from continuing operations of 11 cents per share was substantially better than the Zacks Consensus Estimate of a loss of 29 cents. This also compares favorably with a net loss from continuing operations of $1.03 in the prior-year quarter. Results for the quarter mainly benefited from a decrease in provision for loan losses and lower non-interest expenses which were offset by lower non-interest income and low growth in average earning assets.

 

While the results continue to be affected by the difficult operating environment, we expect that the business restructuring actions undertaken by the company will fuel its credit quality, capital position and liquidity. We remain conservative on the company’s outlook, though the degree of pessimism is subdued with the early sign of recovery of certain metrics.