Today, the emperor's clothes are from Brooks Brothers. After the next round of annual meetings, they may very well come from Wal-Mart.

Proxy advisory firms are urging investors to reject pay at three banks this week: Orrstown Financial Services (ORRF), Sandy Spring Bancorp (SASR) and Sterling Bancorp (STL). The outcomes could influence executive pay and gauge how much power management wields over investors.

Institutional Shareholder Services wants shareholders to reject executive compensation at all three companies. Glass Lewis is recommending a "no" vote at Sterling.

Agitated shareholders have given a thumbs-down at other banks, rejecting compensation plans at Citigroup (NYSE: C) in New York and First Merit (FMER) in Akron, Ohio. That should make management teams slightly nervous.

"Virtually all companies are taking this very seriously," says Ron Schneider, a senior vice president at Phoenix Advisory Partners in New York, which advises banks on proxy fights and shareholder proposals.

"At first, the focus is on the CEO's pay," Schneider says. "Then the focus shifts to the board's compensation committee that approved the CEO's pay."

Shareholders have backed most banking companies' compensation structures, though some results were less than encouraging. About 58% of investors backed pay at Bank of New York Mellon (BK), and 71% supported Hancock Holding (HBHC). A say on pay approval of less than 75% is a cause for concern, Glass Lewis has stated.

A spokesman said Louis Cappelli, the chairman and chief executive at New York's Sterling, would not comment. Calls to Orrstown, in Shippensburg, Pa., and Sandy Spring, in Olney, Md., were not returned.

Of the small banks facing negative recommendations, Sandy Spring has the shortest list of complaints from ISS. The $3.7 billion-asset company includes "golden parachutes" in the employment contracts for Daniel Schrider, its president and chief executive, and two other executives, ISS said in an April 12 report.

Schrider's package features an excise tax gross-up payment that kicks in if he leaves the company. That type of payment could lead executives to "negotiate merger agreements that may not be in the best interests of shareholders," the ISS report said.

Sandy Spring's board urged shareholders to support its executive compensation plan, claiming in a March 29 regulatory filing that the pay practices "are appropriately aligned to the long-term success of [the company] and the interests of shareholders."

Sandy Spring's compensation committee "will take into account the outcome of the vote when considering future executive compensation arrangements," the company said in its proxy filing.

ISS expressed concern with the pay practices and shareholders' rights at the $1.4 billion-asset Orrstown, even though the board cut the pay of Thomas Quinn, Orrstown's president and CEO, because of a lagging stock price. ISS said Quinn's compensation is still not properly aligned with the company's performance.

ISS wants Orrstown to require Quinn to hold more company stock. "Quinn currently holds just over $50,000 worth of company stock, and another 6,000 deeply underwater options," ISS wrote in an April 11 report.

Quinn also has a golden parachute, in the form of an excise tax gross-up payment. If paid, it would place an "extraordinary financial burden" on shareholders, ISS said.

ISS urged investors to back a proposal by shareholder Gerald Armstrong that would require Orrstown to have a supermajority vote to support any action that comes before the company. "Requiring more than a simple majority may permit management to entrench itself by blocking amendments that are in shareholders' best interests," ISS said.

Orrstown's board recommended votes against Armstrong's proposal, while asking shareholder to support its compensation structure. "Our executive compensation program achieves our intended objective to provide fair, reasonable and appropriate levels of compensation and benefits," Orrstown said in its March 30 proxy filing.

ISS and Glass Lewis want investors to reject the compensation plan at Sterling, taking issue with golden parachutes and payments that are not aligned with company performance. ISS also said Cappelli is paid significantly more than CEOs at similar banks. "A properly structured pay program should motivate executives to drive corporate performance, thus aligning executive and long-term shareholder interests," Glass Lewis wrote in an April 10 report.

Sterling disagreed with one of the assessments in an April 23 regulatory filing. The $2.5 billion-asset company said the makeup of the peer group used as a comparison for Cappelli's compensation was flawed, that it disagrees with how it measured the company's stock performance and that other arguments were flawed.

Orrstown shareholders meet Tuesday. Sandy Spring's shareholders will gather Wednesday, and Sterling will host investors the next day.

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