With the 2011 proxy season underway, the early returns are in: Among the first 30 Fortune 500 companies to file proxies, an analysis finds the focus to be on eliminating “hot” shareholder issues such as tax gross-ups and enhancement of shareholder alignment through tools such as ownership guidelines, anti-hedging policies and improved disclosure to ensure shareholders make an informed vote.
These first 30 companies range from $5 billion to $125 billion in revenue and span a variety of industries.
Author Yonat Assayag
New federal regulations under the Dodd-Frank Act require companies to hold non-binding shareholder votes on their executive pay programs (say on pay), the frequency of future say-on-pay votes (say on frequency), and golden parachute payments in the event of a transaction (say-on-golden parachutes). The say-on-pay and say-on-frequency votes are required for all publicly-traded companies with annual shareholder meetings held after January 21, 2011. The say-on-golden-parachutes requirement is effective April 4, 2011. Smaller reporting companies (less than $75 million in public float) are granted a two-year delay until these votes are effective.
As boards consider implications of these advisory votes, they no doubt are wondering what other companies are doing in light of say on pay. Are companies “staying the course” and letting the chips fall as they may, or are they proactively modifying their executive pay programs and/or disclosure in an attempt to secure majority support from shareholders?
Program Changes
Author Russ Miller
In 2010, companies sought to minimize shareholder distractions and improve the pay/performance relationship and shareholder alignment:
- Ashland Inc., Johnson Controls and six other companies eliminated excise tax gross-ups
- Of 20 companies disclosing clawback provisions for their named executive officers, 10 adopted these provisions recently. For example, Franklin Resources and Visa implemented clawback provisions in 2010
- While CEO stock ownership guidelines of 5x salary is most common among Fortune 500 companies, two companies (Qualcomm and Agilent Technologies) increased their guidelines from 5x to 6x salary, possibly in response to Institutional Shareholder Services’ (ISS) preference
- 18 companies disclosed an anti-hedging policy prohibiting executives from using hedging vehicles against the company’s stock, compared to 11 companies in 2009
Disclosure Changes
There was a noticeable shift in the approach to the Compensation Discussion & Analysis (CD&A) section of the proxy statement among the First 30. CD&As are being treated less as a compliance exercise and more as a tool for effectively communicating with shareholders about the decisions and rationale behind the executive pay program. CD&As among the First 30 made information more accessible to the reader:
- Prevalence of executive summaries more than doubled, from nine companies last year to 20 companies this year. Executive summaries highlighted company performance, pay-and-performance alignment, and any key changes to the compensation program
- Companies used more charts and graphs to describe their pay programs and illustrate pay-performance relationships in a user-friendly way. Deere & Co., for example, included a chart in its proxy statement plotting the CEO’s and other named executive officers’ three-year total “realizable” compensation relative to peers vs. relative total shareholder return over the same three-year period.
- In addition, all of the First 30 companies discussed pay versus performance in some way in their CD&A and nine disclosed the information graphically. This level of disclosure may be a preview to the pending pay/performance disclosure requirement under Dodd-Frank, which won’t likely be be effective until 2012.
Say-on-Pay and Say-on-Frequency Resolutions
Given that the SEC did not specify a form of resolution for the shareholder votes, companies took a wide range of approaches in preparing their resolutions. Say-on-pay resolutions ranged from a brief description of the vote with reference to the CD&A (an approach taken by Hewlett Packard, Starbucks and Walt Disney) to a multi-page analysis of the objectives of the compensation program, the pay-for-performance relationship and key features. The most common approach (18 companies) was somewhere between these two extremes, where the company provided a one-page supporting statement reminding shareholders of the key elements of the program (similar to an executive summary).
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