“Most companies are getting executive pay right, but there’s no room for complacency,” said Towers Watson Executive Compensation Business Global Leader Doug Friske during a webcast yesterday to present the results of the professional services firm’s most recent study, Executive Compensation in the Say-on-Pay Era: Winning the Shareholder Vote—Without Losing the Election.
The study—which looked at 170 Fortune 1000 companies whose annual meetings were on or after January 21, filed proxies by late March 2011 and whose CEOs were in their role for the last three years—found that 74.7 percent of the companies’ say-on-pay proposals were supported by at least 90 percent of voters. Only 2.7 percent of the companies had did not have majority support on their proposals.
“One of the most common questions we were being asked was: would proxy advisors like Institutional Shareholder Services be influential on these new votes?” said James Kroll, a senior consultant in Towers Watson’s Executive Compensation Practice, in reference to the say-on-pay and say-on-frequency votes that many companies are facing for the first time this proxy season.
While most companies’ investors approved say-on-pay practices, the 14 percent of companies who received negative ISS recommendations received above-average shareholder opposition. At companies where ISS encouraged a “for” vote, 94 percent also voted “for.” But the 20 companies surveyed who ISS recommended a “no” vote on their say-on-pay provisions received on average 71 percent positive votes; four were rejected by shareholders.
Annual say-on-pay votes have been popular among shareholders so far this proxy season, with annual votes receiving majority support at three quarters of the companies surveyed. Of the companies that recommended triennial votes, a majority of shareholders agreed to only a third.
Doug Friske
Of the decisions made so far, 46 companies chose annual, one chose biennial and 14 chose triennial say-on-pay votes.
“In early January and February, most proxies recommended triennial votes, now most are recommending annual,” continued Kroll. “Companies may be seeing the majority support for annual [votes] from shareholders, which may be driving more businesses to make the annual vote recommendation.”
The study also reported that the median annual base salary for executives increased by three percent. “The pay mix has stayed the same,” explained Olivia Wakefield Lee, a senior consultant at Towers Watson’s Executive Compensation practice. “What has changed is the long- term incentive mix,” with companies using stock options for 33 percent of the mix, as opposed to 39 percent in 2008. Restricted stock has stayed relatively constant, while performance plans make up a higher percentage at 41 this year, over 37 and 36 in 2008 and 2009, respectively.
“Options are not on the verge of extinction, but they will decrease in percentage of the mix,” predicted Wakefield.
Compensation committees and consultants were recently handed new regulations stemming from the Dodd-Frank Act regarding their independence and possible conflicts of interest. Steve Seelig, executive compensation counsel for Towers Watson’s Research and Information Center, advised companies to be on the lookout for more regulations. “We don’t anticipate things to be too tumultuous when it comes to regulations from Washington,” he said, but “there are some regulations pending, and it’s not too early for companies to focus on complying with them, since the rules are somewhat cumbersome.”
While there is currently legislation in the House to repeal the mandated disclosure of CEO pay vs. median employee pay, Seelig said: “I don’t see it going through the Senate or being approved by the President.”
Considering the combination of these types of increased disclosures and shareholder say on pay, companies must be especially cognizant of how they present their compensation practices in their proxies.
There is no formulaic method to encourage shareholders to approve say-on-pay plans, Seelig said. Rather, companies must look at their own shareholders and determine what their concerns are, and what the proxy advisors that most shareholders listen to are recommending.
“The results will change every year,” Seelig explained. “Stay committed to your principals and practices; shareholders will support your approach if they see it’s been thought through.”