SAN FRANCISCO >> Oracle is facing a potential shareholder revolt against a compensation formula that has consistently made its billionaire co-founder, Larry Ellison, one of the best-paid CEOs in the world.

The business software maker staunchly defended Ellison’s pay in a letter sent to shareholder activist firm CtW Investment Group in an effort to rally support for its board of directors before the 11 members stand for re-election at Oracle’s annual meeting on Oct. 31.

The letter released in a regulatory filing today came in response to a scathing attack that CtW launched last week against the compensation that Ellison has been receiving from the Redwood Shores, Calif., company for years.

CtW doesn’t own any Oracle shares directly, but the Washington D.C. group is paid to fight for shareholder causes. It is vowing to organize the pension funds of labor groups that are stockholders unless the company changes its ways. Oracle’s letter gave no indication that the company is going to relent, setting the stage for an attempt to oust at least three of Oracle’s directors at the annual meeting.

"It seems pretty clear that they aren’t willing to listen to the concerns of shareholders," said Rich Clayton, a research director at CtW. A truce could still be reached during a meeting with an Oracle representative that Clayton said is scheduled for Thursday morning in Washington.

Shareholders expressed their displeasure with Oracle’s compensation practices at the company’s annual meeting last year. About 59 percent of the shareholders voted against a "say-on-pay" proposal seeking an endorsement of the board’s compensation policies. That vote was non-binding, and Oracle’s compensation committee decided that no significant changes to its practices were needed, according to the company’s proxy statement for the upcoming annual meeting.

Oracle Corp. awarded Ellison a pay package valued at $78.4 million in its last fiscal year ending in May, down from $96.2 million in the previous year.

Ellison, 69, could have made even more last year if he hadn’t turned down a $1.2 million bonus. He also limited his salary to $1 annually, a symbolic measure that has been embraced by several other Silicon Valley CEOs who are already billionaires, including Google Inc.’s Larry Page and Hewlett Packard Co.’s Meg Whitman.

Oracle has primarily paid Ellison through stock options and other long-term incentives designed to prompt him to boost the company’s market value and enrich shareholders. Ellison’s pay packages have included an award of 7 million stock options in each of the last six years. Those awards are the main reason Ellison has ranked among the top-paid CEOs in each of those years.

The ultimate value of Ellison’s stock options hinge on how Oracle’s stock fares. In its response to CtW, Oracle pointed out that some of the stock options issued in Ellison in past years haven’t made him any money because the cost of exercising them was higher than the price of the company’s stock.

Millions of other stock options have yielded windfalls that have helped Ellison build upon a fortune estimated at $41 billion by Forbes magazine.  Since the end of Oracle’s fiscal 2007, Ellison has realized gains totaling $851 million by exercising 55.4 million stock options, according to the company’s regulatory filings. More than $151 million of those gains came in Oracle’s most recent fiscal year.

If Oracle refuses to change its policies CtW plans to wage a campaign aimed at persuading its labor union allies and other major Oracle shareholders to oppose the re-election of the three directors on the company’s compensation committee.

Those directors are: Bruce Chizen, a former CEO of Adobe Systems Inc. who has chaired the compensation committee for nearly three years; venture capitalist George Conrades, who is also chairman of Akamai Technologies Inc.; and Naomi Seligman, a partner at technology consultant Ostriker von Simson.

Earlier this year, CtW led shareholder protests against Hewlett-Packard’s board. Although the directors were re-elected, the opposition was strong enough to culminate in former Oracle executive Ray Lane’s resignation as HP’s chairman and the departure of HP’s two longest-serving directors.

In its letter, Oracle accused CtW of trying to orchestrate a misleading campaign against the company’s board and hailed Ellison as "its most critical strategic visionary, a role that he has served and continues to serve our shareholders extremely well."

With Ellison in charge, Oracle said it has returned nearly $40 billion to shareholders during the past decade. The company’s stock rose by 28 percent in its last fiscal year, outperforming the 24 percent increase in the Standard & Poor’s 500 over the same period.

Even without options, Ellison benefits more than any other Oracle shareholder when the stock rises because he owns a 25 percent stake in the company.

Ellison has used his wealth to buy luxurious estates around the world, as well as his own Hawaiian island, Lanai. He also bankrolled two victories in the America’s Cup, with the most recent triumph in sailing’s most prestigious event coming last week in San Francisco. Oracle’s brand was featured prominently in the competition.