Bowing to pressure from a large shareholder before a proxy showdown next month with hostile bidder Oracle Corp., PeopleSoft Inc. has agreed to tie half of executive stock options and awards to performance.

The California Public Employees' Retirement System, the nation's largest pension fund that has taken sharp aim at executive pay this proxy season, withdrew its proposal that PeopleSoft base 75 percent of executive pay on performance following negotiations with the PeopleSoft board. CalPERS had planned to submit the proposal for a vote at PeopleSoft's annual meeting March 25.

Instead, starting in 2005, the Pleasanton software maker will follow the lead of software giant Microsoft Corp. and base 50 percent of the options and restricted shares given to PeopleSoft CEO Craig Conway and the four other highest-paid executives to performance targets, PeopleSoft said in a filing with the Securities and Exchange Commission. Those targets have not yet been set by the board of directors.

PeopleSoft spokesman Steve Swasey said PeopleSoft did not tweak its executive pay to shore up shareholder support in preparation for the Oracle proxy battle next month. "We have had a lot of interaction with shareholder groups that was separate from that," he said.

But making these kinds of changes could be critical in fending off a proxy fight, executive pay experts say. "Working with large shareholders to get them comfortable with corporate governance policies and programs puts them in a better position to ward off a proxy fight," said Terrence Brown with Sibson Consulting in Los Angeles.

Lavish pay packages have faced mounting criticism in the wake of a growing number of corporate scandals. CalPERS and other institutional investors have stepped up pressure on companies to link pay to performance. Several hundred shareholders submitted proposals last year to rein in executive pay, according to the Investor Responsibility Research Center.

"CalPERS operates behind the scenes and is very effective at engaging companies in dialogue and at getting them to compromise," said Kevin Cameron, president of Glass Lewis & Co., an independent research firm in San Francisco that provides proxy-voting advice to institutional investors.

Last June, CalPERS outlined standards it would use to crack down on excessive executive pay packages. "Our goal is to help corporations create well-designed compensation packages that align management with owners and drive long-term superior performance," said CalPERS spokesman Brad Pacheco.

PeopleSoft has come under fire for overpaying its executives. Glass Lewis gave PeopleSoft a "D" grade for paying its executives more than most other large software makers when measuring pay against performance, similar to the method CalPERS adopted.

PeopleSoft said it compensates Conway based on PeopleSoft's performance vis-a-vis its objectives and its competitors. Conway was awarded 1.5 million stock options in 2003, down from 4.1 million options and $14.6 million in restricted stock in 2002, according to the filing. Conway's 2003 options are valued at $42.9 million, provided the stock rises 10 percent a year for 10 years.

In addition to his base salary of $1 million last year, Conway received a $2.3 million bonus -- $1.5 million for his "outstanding performance in leading PeopleSoft" and $500,000 related to the purchase of rival J.D. Edwards & Co. He also received a $325,000 retention bonus.

Conway could receive more than $60 million if Oracle's hostile takeover bid for PeopleSoft succeeds -- a golden parachute that Oracle has roundly condemned in letters to PeopleSoft shareholders.

PeopleSoft announced other adjustments to the way it compensates executives in late January. Chief Financial Officer Kevin Parker, in discussing PeopleSoft's fourth-quarter financial results, said PeopleSoft this year would not give top executives a pay raise and would give executives restricted shares, not stock options.

PeopleSoft also reduced the number of stock options available to employees and executives from 5 percent to 3 percent of outstanding shares each year. Parker also noted that PeopleSoft canceled more than 9 million shares already available to be issued under the stock option plan.

"These actions significantly reduced the potential dilution for our stockholders and are a clear sign that we remain committed to driving long-term stockholder value at PeopleSoft," Parker said.

But the actions also raised hackles. Institutional investors generally oppose "evergreen" provisions that automatically make shares available for grant each year, diluting investors' stakes. Such provisions should be put to a shareholder vote each year, Cameron said.

"PeopleSoft cunningly included the evergreen provision to ensure the plan keeps recreating options that can be granted to employees," Cameron said. "They make a big deal about reducing the evergreen provision over time, but it calls into question why the heck they have it in the first place."

PeopleSoft also reiterated its opposition in Thursday's filing to deducting the cost of stock options from earnings. The employees pension plan of the American Federation of State, County and Municipal Employees and the Connecticut Retirement Plans and Trust Funds have asked shareholders to vote to require PeopleSoft to expense options.