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In the second year of mandatory say-on-pay voting, the majority of S&P 500 companies passed their resolutions, including the four companies that failed say on pay in 2011, according to a CAPFlash 2012 Proxy Season Update. Margaret Engel, a partner with Compensation Advisory Partners, says this improved performance is one of several indicators that companies value shareholder approval of executive compensation packages.
“Companies are reaching out and engaging with shareholders to get a clear sense of what in their programs is causing shareholders to reject them,” she explains. “The amount of engagement has increased.”
The four companies that did not pass their say-on-pay resolutions in 2011—Hewlett-Packard, Jacobs Engineering, Masco Corp. and Stanley Black & Decker—all made significant changes in 2012. Hewlett-Packard changed how it targets executive compensation, redesigned its annual incentive plan, disclosed more information about finances and changed the CEO pay plan, among other changes. “They made a real effort to make their program more shareholder-friendly and have pay and performance line up,” Engel says. “You can see the other companies are doing similar things—a lot have increased stock ownership guidelines or changed severance benefits.”
Despite the improved performance of these four companies, seven S&P 500 companies did not pass their say-on-pay resolutions in 2012: International Game Technology, Citigroup, Cooper Industries, Mylan, NRG Energy, Pitney Bowes and Simon Property Group.
Engel notes that there are a variety of steps these companies, and those who may have passed say on pay but with low levels approval, can take to improve their voting record. She suggests companies reach out to their shareholder base to get an understanding of what the irritants might be. “Step back, reevaluate and identify if there is a pay and performance disconnect or if the issue might be non-performance based pay and be prepared to accept change,” Engel suggests.
One strong incentive for companies to make changes in order to pass say-on-pay resolutions is the connection CAP notes between pay and performance. “Companies with 90 percent approval or better tended to have better financial performance and companies with lower stock prices tended to receive lower levels of shareholder support,” Engel says. Essentially, companies that perform well are less likely to have issues because the shareholders are happy, she explains.
Proxy advisory services are also playing a role in shareholder approval, according to the CAP report. Companies that received a “for” recommendation from Institutional Shareholder Services had average shareholder support of 93 percent while companies that received an “against” recommendation from ISS had average shareholder support of 58 percent, the CAP report said.
With say-on-pay resolutions only in the second year, it’s difficult to predict what challenges companies could face in the future, but with the median vote in support of say on pay in 2012 holding at 93.7 percent, it’s clear a majority of companies believe shareholder support is an important commodity. For those companies who didn’t make the grade this year, there is hope for 2013.
“If you look at companies that failed last year, and they have all passed this year, it’s pretty clear you can turn a negative vote around,” Engel says. “If they’re prepared to make an effort to reach out to shareholders and reevaluate and make modifications to their programs, they could see big improvement next year.”