As companies start preparing for the second proxy season under new requirements from the Securities and Exchange Commission that mandate shareholder advisory votes on executive pay programs, it is worthwhile to look at this year’s results and consider the lessons learned. Companies can use this information to improve their program designs and disclosures, avoid pitfalls and increase their prospects for gaining shareholder support in 2012.
With few exceptions, companies have issued formal recommendations to shareholders that future “say-on-pay” votes be held annually, biennially or triennially. Early in the 2011 proxy season, the trend was toward recommending triennial votes. But as large institutional investors and major proxy advisory groups (e.g., ISS Governance Services, Glass Lewis) expressed a strong preference for holding annual votes, more companies began recommending them. As of July, 51 percent of companies had recommended annual say-on-pay votes, versus 44 percent for triennial votes, with the remaining companies either for biennial votes or not making any recommendation.
Overall, 73 percent of all shareholder votes followed the company’s recommendation on frequency. However, 99 percent did so when the company endorsed an annual vote. More than 50 percent of the time, shareholders voted with a company’s triennial recommendation. This may be indicative of shareholders not following proxy advisor recommendations or agreeing with arguments that a vote every three years would be less administratively burdensome, be consistent with the compensation planning cycle and allow sufficient time to address shareholder concerns.
Overwhelmingly, shareholders have supported the executive pay packages in say-on-pay votes. Of the 2,732 shareholder votes held by early July, nearly 99 percent received positive outcomes, with only 37 companies failing to win majority shareholder support. While there’s no distinct size or industry profile among the companies with negative voting outcomes, the consumer discretionary industry and midsized companies ($500 million to $5 billion in revenues) have been most prone.
Despite the high level of shareholder support, say on pay has had an influence on programs. Most companies took action well in advance of votes to address known shareholder concerns and avoid negative votes. Others were making changes and defending themselves against criticism up to the last minute. For example, more than 50 companies filed public rebuttals against negative recommendations from proxy advisory firms.
Lessons From Year One
There were several notable issues among the small minority of companies that received a relatively high percentage of dissenting votes from shareholders to date. They include:
- Low Total Shareholder Return (TSR): 31 of the 37 companies that received a negative vote had one- or three-year TSR below their industry medians.
- Pay-for-performance disconnect: Year-over-year CEO compensation increased, while company performance lagged industry peers.
- “Red flag” compensation: The company had controversial pay practices such as newly adopted excise tax gross-up provisions in change-in-control agreements.
Clear Impact on Outcomes
The voting recommendations by ISS have had a clear impact on outcomes. ISS has recommended against say-on-pay proposals at more than 300 companies, including all 37 say-on-pay vote failures. Shareholder approval rates averaged 68 percent for companies that ISS recommended “against,” and 92 percent among companies that ISS recommended “for.” Further, no company that received a positive recommendation from ISS has failed to receive majority shareholder support.
Companies that ignore the say-on-pay message delivered by shareholders risk continued dissatisfaction, possible voting campaigns against directors or even legal action. Instead, companies can use the votes and the information they gather to improve communications with shareholders and, ultimately, ensure programs are understandable, appropriate and effective.
Michael Enos is managing director of Pearl Meyer & Partners in Boston.