A look at trends and developments in the second say-on-pay proxy season in
bought back employees’ underwater options in 2009, the Californian
semiconductor manufacturer anticipated a backlash. What it didn’t
necessarily envision was that shareholders would revisit the decision each
proxy season in the form of an annual say-on-pay vote.
‘We knew in the purest ideological sense that you get a black mark against
you for repricing options,’ says Chris Evenden, Nvidia’s senior director of
‘But if someone wanted to get options repriced, the easiest way of doing
that was to change companies – so our options had become a disincentive for
performance. Sometimes you’ve just got to take your lumps rather than have
an outflow of staff.’
Evenden, who has personally made this case to Nvidia’s top shareholders,
realizes that the argument rests on industry specifics. In the repricing
options debate, it matters, for instance, that star engineers in Silicon
Valley can easily find positions at a host of semiconductor competitors.
For IR professionals like Evenden, say on pay is a time-consuming and
angst-ridden issue (in 2010, the company received 68 percent shareholder
support on pay, just under the 70 percent threshold considered ‘safe’ for
future votes), and for the rare marquee-name company that loses a say-on-pay
vote, the issue can prove a PR nightmare.
On April 17, for instance, Citigroup made the front page of the New York
Times when only 45 percent of shareholders approved the bank’s $15 mn
compensation for CEO Vikram Pandit.
Taking the lead
More than 40 percent of IR professionals in the US had some sort of
involvement with say on pay during the 2011 proxy season, according to a
report published earlier this year by IR Insight, the research arm of IR
As that report suggests, it is the corporate secretary who most often
spearheads a company’s say-on-pay campaign. At Valero Energy, for instance,
the corporate secretary takes the lead on say on pay, while Ashley Smith,
vice president of IR, handles the company’s outreach to its top 25 holders.
‘Once say on pay becomes an issue with investors, that’s when I get into the
mix,’ Smith comments. ‘I start making phone calls to explain the situation,
and I try to sway votes.’ He estimates that during November and December, he
spent three to four hours a week discussing pay with investors.
The corporate secretary also took the lead at Nvidia, while Evenden
contacted the company’s top 20 shareholders, which account for 52.9 percent
of the company’s shares.
Evenden quickly learned that the portfolio managers with whom he had a
long-standing relationship rarely engaged in the say-on-pay conversation, so
the firm had to forge relationships with individuals in various governance
‘The challenge was that we’d never communicated with them before, and we
were suddenly obliged to communicate,’ he recalls.
Evenden spends one month a year working on say on pay and coordinating the
company’s investor outreach plan. On most calls, he accompanies the
corporate secretary and the senior HR person, who is the expert on options
and restricted stock units.
Evenden is keen on board involvement because it enables directors to learn
first-hand what investors think. He also maintains that institutional
investors may feel uncomfortable discussing the CEO’s pay with an IRO,
because the IRO is subordinate and will almost inevitably earn less. This
awkwardness can be sidestepped when directors and shareholders talk directly
to one another.
The corporate secretary-led set-up is far from universal, however. At
California-headquartered Autodesk, Dave Gennarelli, director of IR, assumes
the lead on say on pay, even though legal and HR are intimately involved.
‘I’m the go-to person for getting it all done,’ he says. Typically,
Gennarelli dedicates two to three months of ‘hard labor’ to this issue.
Autodesk, which received 84 percent support for its pay plan last year, has
found that there’s no blueprint for how investors handle proxy voting.
‘There are some institutions that are very strict and follow their
guidelines to the letter,’ Gennarelli points out. ‘Others put forth
guidelines, but the rules aren’t hard and fast. There’s some wiggle room –
so opening up that dialogue is key.’
Meanwhile, Consol Energy falls somewhere in between: legal, IR, management,
the board and the company’s outside compensation adviser all work closely
together on say on pay.
Dan Zajdel, vice president of IR, describes his job as engaging in active
outreach to large institutional investors throughout the year.
‘As we move toward the end of the calendar year, we ask whether there are
any outstanding issues shareholders wish to discuss with us,’ Zajdel says.
Soliciting investor feedback is, for him, the key to understanding issues of
importance to shareholders.
Fabrizio Ferri, assistant professor at Columbia Business School, believes
facilitating a dialogue is the IR professional’s chief responsibility. ‘The
IRO’s job is to promote that conversation in a systematic and organic way
ahead of an actual vote,’ he emphasizes.
Avoiding the hot seat
Some companies know they’re facing thorny compensation issues but can still
be taken aback when one of the major advisory firms recommends a ‘no’ vote.
Smith faced that situation when Glass-Lewis again issued a critical report
on the company’s pay practices in April 2012 – even though ISS had been
favorable for the previous two years running.
He finds the mixed messages frustrating: ‘You don’t always know how to get
an A,’ he says. ‘It’s all about carrots and sticks, and the big stick is
when proxy consultants go after board members. That’s how they flex their
Too often, observes Evenden, the arguments about executive compensation
hinge on arcane points requiring lengthy explanation. In 2011, for instance,
ISS measured Nvidia’s performance on a calendar year rather than the fiscal
year used by the company. This meant ISS’ assessment was very different from
Nvidia’s (semiconductor stock prices are notoriously volatile).
ISS also penalized Nvidia for dramatically increasing CEO Jen-Hsun Huang’s
salary, even though it had returned to usual levels after he received $1 in
compensation the previous year. ‘It was touch and go for a while because
this registered as a massive pay increase,’ says Evenden.
Although many things can trigger say-on-pay woes, poor performance is a
factor. Zajdel is hopeful that Consol’s record net income and record cash
flow from operations in 2011 will be favorably viewed by shareholders. Last
year, Consol received 55 percent support in its say-on-pay vote.
Even with strong performance and no compensation red flags, however, many
companies are still dead serious about their say-on-pay efforts.
Microsoft, for instance, received 99 percent support last year for its pay
package – and yet twice a year, Bill Koefoed, general manager of IR, and
John Seethoff, vice president and deputy general counsel, reach out to the
proxy teams at 20 to 30 of the company’s largest investors.
‘Our CEO’s base pay was $500,000 and his bonus was $500,000,’ says Koefoed.
‘Given that we’re a Fortune 10 company, people don’t have a problem with
Inspired by efforts to shore up the company’s say-on-pay vote, Evenden is
looking for ways Nvidia can communicate plainly about compensation in its
proxy. In this sense, say on pay is proving a resounding success. Evenden
also welcomes the new dialogues the issue has sparked, as does Gennarelli.
‘All in all, I’ve developed a much stronger relationship with the voting
side of these institutions, which I’d never cultivated before,’ Gennarelli
notes. ‘Say on pay definitely spurred that.’
A new dialogue
Ferri confirms that in the UK, where say-on-pay votes have occurred for the
past decade, the main benefit has not been lower executive compensation
levels (these haven’t budged) but in setting the stage for a constructive
In the US, where compensation sums have hit astronomic levels unknown
elsewhere, say on pay might actually temper corporate largesse, suggests
‘The whole point of a say-on-pay vote was to provide the board with the
backbone to stand up to the CEO when it comes to compensation,’ he observes.
And although one year makes for a very short track record, he’s seen signs
that say on pay is achieving this end, too.
Reading the most recent round of proxies, Ferri notes that many companies
did address shareholders’ concerns about compensation and altered their pay
Consol Energy, for instance, froze executive salaries and reduced CEO Brett
Harvey’s annual salary by $100,000, moving his payout to more at-risk forms
‘What you want is a more constructive conversation about how to turn the
compensation scheme into a competitive weapon for a company to perform
better,’ concludes Ferri. ‘The anecdotal evidence so far is that companies
responded to the votes.’
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