A prominent investor in Wal-Mart Stores Inc (WMT.N) is pushing ahead with a campaign to link a portion of executive compensation to staff motivation, a sign that the retailer's wage hike last week won't end outside pressure over employee pay and benefits.

Connecticut Treasurer Denise Nappier, whose office oversees $40 million worth of Wal-Mart shares in state pension and trust funds, in December submitted a proposal calling for the incentive pay of senior executives to be tied in part to a measure of "employee engagement", according to previously unreported filings to the Securities and Exchange Commission.

Wal-Mart is fighting to keep this and other select proposals off the ballot for its annual meeting in June, filings show. Because the Walton family controls a majority of shares, outside proposals can be easily defeated even if they are put to a vote, and in any case are usually non-binding.

 

But even a losing battle could raise pressure on the retailer, potentially leading to compromise.

The proposal by Nappier, a Democrat, shows how some investors are searching for new ways to tackle social issues which they argue are key to a company's financial success. This includes the belief, shared by a growing number of investors of all political stripes, that low-wage employers have underinvested in people to the detriment of long-term returns.

Some are aligned with labor groups fighting for a "living wage" and better conditions at retailers and fast-food chains: Connecticut's proposal is a revised version of a union-supported submission that failed to make the Wal-Mart ballot last year.

In another proposal, a group of Catholic nuns is urging Wal-Mart to disclose a comparison of the pay of top executives to the median store employee wage and explain changes in the gap over time.

Wal-Mart is not the only low-wage employer to face scrutiny over pay. McDonald's Corp(MCD.N) and other fast-food chains have also been the target of nationwide protests calling for the wage floor to be set at $15 an hour.

Wal-Mart last week said it was raising its minimum U.S. hourly wage to $9 in April and $10 for current employees next year, compared to the federal minimum of $7.25. Wal-Mart spokesman Randy Hargrove said its $1 billion investment in wages and training would reduce turnover and improve engagement - addressing the same issue targeted in Connecticut's plan.

In a statement to Reuters, Nappier commended the wage hikes as a "step in the right direction toward investing in human capital". She said she would urge the SEC to allow a vote on the proposal to "ensure that Wal-Mart is committed over the long-haul on this important element of sustainable growth."

The SEC declined to comment.

FLASHPOINT

Lawyers for Wal-Mart argue the proposal involves "ordinary business" matters, a common SEC criteria for exclusion, and that it has already been implemented in other ways, citing a diversity and inclusion metric that partially determines pay in an annual incentive plan.

The Connecticut proposal defines engagement as the extent to which workers are motivated to "apply discretionary effort to accomplish organizational goals". It calls on the compensation committee to work with outside experts to measure engagement, which would complement financial metrics in determining pay.

Wal-Mart has long been a flashpoint in the debate over employee treatment. Of the roughly 350 proposals that appeared on U.S. shareholder ballots over the past decade related to human capital management, 16 were at Wal-Mart, the most of any company, data from Institutional Shareholder Services shows.

The growing debate about worsening income inequality in the United States has put a spotlight on how fast-food chains and retailers treat their staff, both as a social issue and from the perspective of investment returns.

"Our message to any retailer would be that employees are your front line. You need to treat your human capital as you would treat your financial capital," said Anne Sheehan, director of corporate governance at the California State Teachers' Retirement System, which holds nearly $400 million worth of Wal-Mart shares.

Sheehan declined to comment specifically on Wal-Mart because the fund is suing current and former executives over allegations of bribery in Mexico that first surfaced in a New York Times article in 2012. Hargrove declined to comment on that matter, citing an ongoing investigation.

SEEKING MORE

With the wage hike, Wal-Mart showed it "can stand up to the plate and be a better company," said Cynthia Murray, an employee, shareholder and member of the OURWalmart labor activist group, who submitted her own proposal calling for the company to address gender-based pay inequity. "Why should we stop at that? We need more."

Hargrove said the company had included 27 proposals over the past 6 years and only seeks to exclude those they believe don't meet SEC guidelines or involve topics better left to management or the board. "Shareholders have varying views and they are important and we take them into consideration," he said.

Lawyers for Wal-Mart are arguing against inclusion of six proposals in 2015, including one calling for an independent board chairman that has been on the ballot the past two years, according to letters filed with the SEC.

The independent chairman proposal was supported by 15.4 percent of the vote in 2014, short of the 20 to 30 percent threshold governance experts say can generally prompt a board to seriously consider an issue or take action.

But excluding the Walton block of stock, the measure got 40 percent of the "independent" vote, up from 36 percent in 2013.

Submitted by the International Brotherhood of Teamsters General Fund, the proposal cites the allegations of bribery in Mexico as one of the factors underlining the need for improved oversight. The current board chairman is Rob Walton, scion of the billionaire family that founded the retailer.

The Teamsters fund is contesting Wal-Mart's argument that the proposal should be excluded because it is vague, correspondence with the SEC shows.

As examples of independent oversight, Hargrove noted that 70 percent of the board is independent, that it has an independent lead director and has long separated the roles of chairman and CEO.