What a difference a
year makes in the battle over executive pay.
Walt Disney Co. bowed to criticism from Institutional Shareholder
Services Inc., the biggest proxy-advisory firm, by killing a
controversial pay practice days before its annual meeting. This year,
however, the media giant came out swinging.
Disney CEO Robert Iger
with Mickey Mouse at Disneyland in May.
"out of touch," Disney said in a regulatory filing March 1, after the
proxy-advisory firm said CEO
Robert Iger's performance didn't justify his compensation, valued
at $31.4 million in the year ended Oct. 1. Disney said ISS
"offhandedly and improperly dismissed the board's well considered
A showdown looms
Tuesday, when Disney shareholders will again cast their annual-meeting
ballots in a mandatory vote of confidence in the company's
executive-pay practices. There will be a lot of people in investor
relations departments cheering Disney on.
Companies have long
locked horns with ISS, which advises investors like pension funds and
mutual funds on corporate votes. But unease with the firm's ability to
sway "say-on-pay" votes, which aren't binding but can be embarrassing
for companies to lose, has kicked the antagonism up a notch.
Already, Disney's more
aggressive stance seems to be having an effect. The California Public
Employees' Retirement System will ignore ISS and support the media and
entertainment giant's pay practices, an official of the biggest U.S.
public pension fund said.
Calpers owns about 5.7
million Disney shares. A Disney spokeswoman declined further comment.
"Many companies are
telling their pay story better,'' said Glenn Booraem, a principal of
Vanguard Group Inc. He oversees its corporate governance program for
U.S. investments worth more than $800 billion.
Many money managers
have long followed ISS's recommendations on shareholder proposals,
director elections and other ballot issues, which can be a problem for
companies now that a 2010 financial overhaul law requires them to
conduct regular votes on executive pay.
Companies complain ISS
has a stranglehold on how performance-related pay is judged. ISS
rejects the criticism. "There is not a monolithic group of investors
following one proxy adviser,'' says Carol Bowie, the advisory firm's
head of research for the Americas.
But the firm's advice
does carry a lot of weight. On average, a negative ISS recommendation
influences between 13.6% and 20.6% of votes cast on management
proposals, according to a study published in the journal Financial
Management. And ISS has made a lot of negative recommendations on pay,
advising investors to oppose 11% of roughly 3,300 say-on-pay votes
during 2011, according to Ms. Bowie.
In response, companies
have begun lobbying investors aggressively with challenges to ISS's
assessments and alternative ways of measuring how CEO pay is tied to
performance. About 100 companies challenged negative ISS
recommendations last year, estimated James D. C. Barrall, an
executive-pay specialist at law firm Latham & Watkins LLP. He said he
wouldn't be surprised "to see at least twice as many challenges in
2012, given the emerging battle over different ways to measure the
alignment between pay and performance.''
At Disney, ISS dropped
its 2011 negative recommendation after the company decided to
eliminate "gross-up" provisions in employment agreements for Mr. Iger
and three fellow executives. Under those provisions, the company would
have paid taxes on payments due the executives if they lost their jobs
following an acquisition. Disney's say-on-pay vote received support
from 77% of votes cast last year.
Qualcomm Inc. tried fighting ISS this year, with mixed results.
The semiconductor company's CEO, Paul Jacobs, received $21.7 million
in total compensation in the year ended Sept. 25, as his stock awards
more than doubled to $14.3 million.
ISS recommended a "no"
vote, saying the pay was high compared with Qualcomm's peers. Qualcomm
lashed back in a Feb. 21 filing, saying ISS "fails to recognize our
unique business structure'' and wrongly compared Mr. Jacobs's package
to companies with similar revenue rather than market capitalization.
ISS spokesman Ted
Allen defended the methodology, saying revenue "is a widely accepted
measure of a company's complexity and management challenges.''
Qualcomm won approval
of its pay practices at the March 6 annual meeting. But the margin of
victory—at nearly 69%—fell from nearly 95% last year. A Qualcomm
spokeswoman declined to comment.
Another common gambit
is for companies to try to take investors' attention away from the
potential value of stock or options awards at the time an executive
receives them. ISS focuses on that figure, which is what companies
have to report under Securities and Exchange Commission rules.
Now, more companies
are pairing those figures with "realized pay" or "realizable
pay''—calculations that purport to do a better job of reflecting what
executives actually take home.
The approach "can only
decrease the impact of ISS," said Charles G. Tharp, CEO of the Center
on Executive Compensation, a business lobbying group.
Write to Joann S. Lublin at
version of this article appeared Mar. 13, 2012, on page B3 in some
U.S. editions of The Wall Street Journal, with the headline: Disney
Takes On Proxy Adviser.