The Conference Board Governance Center Blog


Say on Pay Review: More Shareholder Engagement, but Pay for Performance ‘Disconnect’

The early word on what U.S. public companies should do following the first mandatory year of Say on Pay is to review the level of engagement with shareholders vs. the level of support the company received on the advisory vote.

Depending on what you read or who you talk to, the word is that companies and their boards should ascertain the power of proxy advisory firms recommendations and whether or not there is a “disconnect” on pay for performance. Those are two issues that have come up in at least two post-proxy season reports and a Webcast.

James D.C. Barrall, a partner at Latham & Watkins and co-author of a new Director Notes report called [Read press release] Say on Pay in the 2011 Proxy Season: Lessons Learned and Coming Attractions for U.S. Public Companies pointed out that this year’s votes were just a warning for the 2012 proxy season.

For those of you keeping score, as of June 30, the total number of companies that failed to get a majority Say on Pay vote was 39, according to FactSet Sharkrepellent. Institutional Shareholder Services (ISS) in its 2011 U.S. Season Review: Say on Pay reported an approval rating of 91.2 percent for the advisory compensation votes compared to 89.2 percent last year when the votes mandated only at U.S. government-supported firms. ISS also reported that the negative Say on Pay votes this year occurred at only 1.7 percent of the 2,200 companies in the Russell 3000 index.

At the same time, it should be noted companies overwhelmingly voted to hold Say on Pay votes annually opposed to triennially with nearly 60 percent voting for that option, according to several sources.

“While only 2 percent of Russell 3000 companies failed to receive majority approval on their say-on-pay advisory votes, the big stories this proxy season have been the unprecedented number of negative recommendations by proxy advisers, their influence on vote results, and companies’ reactions to those negative recommendations,” Barrall said. “More than 100 companies challenged proxy adviser recommendations and methodologies, especially on purported pay for performance disconnects. Some companies changed outstanding agreements or made commitments to prospectively change their compensation policies to reverse negative adviser recommendations.”

The 10-page report, which was also written by Latham & Watkins senior associate Alice M. Chung, offers some recommendations to companies and boards:

  • In light of the difficulties companies encountered this year in engaging shareholders, companies should identify and reach out to their major shareholders much earlier.
  • Some companies whose 2011 bonus, equity, and other compensation grants were already determined before their 2011 say on pay votes may find it impossible to avoid a negative proxy advisory firm vote next year, especially if their 2011 total shareholder returns are below that of their peers.
  • Pay-for-performance issues will be even more important next proxy season, especially if the SEC adopts rules under the Dodd-Frank Act to require U.S. public companies to disclose annually the relationship between executive compensation and the company’s financial performance.

In a June 28 RiskMetrics blog post by Ted Allen, governance counsel and director of publications at ISS Governance Institute, wrote:

“The primary driver of these failed votes appears to be pay-for-performance concerns, which were identified at 27 of these [36] companies [as of last year]. Investors appear to have voted their pocketbooks this season. Almost half all of the failed-vote firms have reported double-digit negative three-year total share returns. Also contributing to investor dissent were such issues as tax gross-ups, discretionary bonuses, inappropriate peer benchmarking, excessive pay, and failure to address significant opposition to compensation committee members in the past.”

Meanwhile, in a BoardVision Webcast hosted by the National Association of Corporate Directors (NACD) on July 8, Scott Olsen, the PwC U.S. Human Resources leader, told NACD’s Peter Gleason he has seen an uptick in the amount of shareholder engagement by companies.

He said: “Well, in our work with compensation committees, we have observed directors making changes to compensation plans in the following ways:

  • Creating plans that are more closely aligned with overall performance including sustainability. One approach in this vein is to place less emphasis on ‘formulaic’ plans and increase the use of non-financial measures.
  • Lengthening of time horizons. More compensation is being deferred, and more companies are establishing performance conditions on long-term incentive grants.
  • Being more cautious about severance provisions in new compensation agreements, and eliminating tax gross-ups and single-trigger change in control benefits.
  • Eliminating or phasing out other executive benefits, like SERPs and perquisites.”

As for next proxy season, Olsen said companies and boards may want to see how their level of shareholder support stacks up against their peers and how it will affect next year’s compensation’s decisions.

“Companies may want to consider the level of shareholder support they received against the median of approximately 85 percent support,” Olsen said. “For example, if a company received 60 percent shareholder support, they might want to dig a little deeper to understand those results even though the resolution may have passed with majority support. Directors should be asking themselves what level of negative shareholder vote should trigger greater action.”

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