The Furor That Wasn't

Somewhat unexpectedly, the 2008 proxy season was relatively quiet. With the pressure building from everything from “say on pay” to proxy access, to continued concerns about high-level payoffs for CEOs overseeing billions of dollars of writedowns, and a faltering economy—not to mention the rise in environmental activism—it might have been expected to be a noisy annual meeting season. Yet compared to some of the events in 2007, there was nowhere near as much upheaval. The effective shelving of proxy access by the Securities and Exchange Commission may have contributed to the relative calm. The increased disclosure of executive compensation has provided so much additional information for investors that some of the quietude surrounding the topic may also be because all these new facts take time to absorb.

Say on Pay

The say-on-pay campaign was one of the more effective headline grabbers of the 2008 proxy season, with resolutions at 76 companies. While the votes have not been overwhelming, there was a slight increase in the average support garnered by the say-on-pay proposals that have come to a vote. According to The Corporate Library’s latest report, “Say on Pay 2008,” average support for the 66 proposals voted on so far in 2008 was at 41.7 percent, compared to 40.8 percent for the 53 votes in 2007. So far, nine companies’ shareholders have approved say-on-pay proposals in 2008, while shareholders at eight companies approved the proposal in the previous year. Some 10 companies have already adopted an advisory vote on pay, with two—Aflac and RiskMetrics Group— already putting compensation to a vote. In each case more than 90 percent of shareholders supported pay practices.

On the other hand, now that both presumptive presidential candidates have declared their support for a shareholder vote on executive compensation — and one that may be mandatory rather than advisory —the current say-on-pay campaign may turn out to be largely irrelevant. Having said that, support for say on pay, along with opposition to the legislation that would force companies to implement it, is forming, with some proponents urging companies to adopt the vote voluntarily so that legislation is precluded.

Coming Clean on Comp

The major issue of concern that arose from the comment letters the SEC sent out following the first round of new disclosures and new compensation discussion and analyses (CD&As) was the disclosure of performance metrics and targets. Many boards described this as being one of the major headaches of preparing a CD&A and the most likely decision to cause problems. However, The Corporate Library found that even in 2007 almost a third of the S&P 500 disclosed numerical or other definitive targets, while almost all companies disclosed the measures in use. We fully expect these proportions to increase in 2008 (pending the completion of our analysis).

There have been claims that the SEC’s advice has been ambiguous on this issue: Companies are allowed to keep targets and metrics undisclosed if they believe their disclosure could cause competitive harm. It has also indicated that the potential for competitive harm can be claimed in exactly the same way that confidential treatment of financially and economically sensitive material is sought in any public filing.

Independent’s Day

There was some shareholder activism surrounding concerns over potential conflicts of interest that could arise when a board’s compensation consultancy provides other services to management, such as administration of pension benefit plans. Congressional hearings and two studies with conflicting findings have done more to raise the prominence of this topic during the proxy season. Although the hearings took place last December, the findings from a study conducted by the Committee on Oversight and Government Reform were clearly on the minds of many boards as they prepared their CD&As. According to the Waxman report, in 2006 the median CEO salary of companies that hired compensation consultants with the largest conflicts of interest was 67 percent higher than the median CEO salary of companies that used independent consultants.

A second study, by Kevin Murphy and Tatiana Sandino of the University of Southern California, refuted that claim. It found that consultancies that provided executive compensation advice in addition to actuarial and other services did not in fact recommend higher levels of CEO compensation. This later study did find—in line with the results from an earlier report from The Corporate Library—that companies which used compensation consultancies, as a group, paid their CEOs more than those companies which did not obtain consultant services. The authors speculate that complex corporations with challenging compensation problems are both more likely to retain a consultancy and more likely to award higher levels of compensation. But they also control for this likelihood by testing whether companies that retain consultants for both executive-compensation advice and director-compensation advice pay more to directors than those who retain a consultancy solely for executive compensation. With this control, they find that companies retaining consultancies for both kinds of compensation pay their directors more.