2011, 6:00 a.m. EST
Say-on-pay vote gives CEOs early trouble in 2011
Investors reject CEO pay at Jacobs
Engineering, send message to Monsanto
Ronald D. Orol,
— Shareholders at a handful of large companies are sending a loud message to
corporate chieftains early on in 2011 that they want an annual vote on the
pay packages of top executives at U.S. corporations, rejecting efforts at
those companies to only hold those votes once every three years.
So far this year, shareholders
at four of seven companies that have proposed a triennial vote at their
annual meetings have disagreed with management and instead pushed for a
say-on-pay vote every year.
“Based on early polling
results, there appears to be a trend towards annual votes,” said Sanjay
Shirodkar, Of Counsel at DLA Piper. “In the long-term we’re going to see
lots of annual votes.”
votes on the pay packages themselves have received mixed results so far in
2011, with the majority of participating shareholders voting against top
executive pay packages at Jacobs Engineering Group Inc.
-0.76%) , a
Pasadena, Calif.-based engineering and construction company with a $6.5
billion market capitalization. The company reported at its Jan. 27 annual
meeting that 54% of participating shareholders voted against the company’s
executive pay package.
Read SEC filing by Jacobs Engineering
Conflicts ahead of
shareholders and executives
Most annual meetings are yet
to come, but the early votes indicate that there will be a lot of conflict
in the months ahead, with shareholders using a new weapon handed to them by
the post-crisis Dodd-Frank Act and a rule based on the statute approved by
the Securities and Exchange Commission.
The SEC adopted a rule on Jan.
25 that gives investors a nonbinding vote on the pay of top executives at
corporations, a provision that is expected to have a transformative impact
on the relationship between chief executives and institutional investors —
in part because of the embarrassment a company experiences if investors turn
out strongly against its executive compensation.
Read about new say-on-pay rule
a large minority vote to oppose executive top pay can be embarrassing. A
large minority of shareholders, 34% of participating shares, voted against
top pay packages at St. Louis, Missouri-based agriculture products giant
“It’s not a good sign that so
early in the season - out of only a handful of companies having meetings -
Monsanto’s say-on-pay vote only received 65% “for” and another company’s
vote did not pass,” said Broc Romanek, editor of The Corporate Counsel.net.
“Although it’s still early, this could be a harbinger that [say-on-pay]
results will defy the predictions of those that felt that most say-on-pay
votes would easily pass.”
Despite opposition by
Monsanto’s management, 62% of shares voted sought an annual say-on-pay vote,
according to a Jan. 25 filing. Only 36% of shares voted to have the vote
every three years. In a Jan. 25 press release, responding to shareholders
opposition, Monsanto agreed to hold an annual vote on pay.
In its proxy filing on Dec.
10, Monsanto defended its recommendation to have investors vote on pay
packages every three years, arguing that a triennial vote would allow
shareholders a way to “better-judge” the company’s pay package program in
relation to its long-term performance.
“One of the core principles of
our executive compensation program is to ensure management’s interests are
aligned with our shareowners’ interests to support long-term value
creation,” the company wrote.
Time to make nice with the
Shirodkar insisted that the
vote at Monsanto indicates that executives there need to either change their
pay packages or do a better job justifying to investors why their
compensation policies make sense.
“It’s a fairly strong message
to Monsanto management that they need to look at exec comp packages,” he
said. “The compensation committee needs to take a serious look at it.”
Shirodkar added that companies
that receive substantial opposition to their recommendation of triennial
votes are expected to change their policies and agree to annual votes.
“These votes are a precursor
of what we’re going to see for the rest of the year,” he said.
Romanek said he expects
corporations to allocate more time and resources for shareholder engagement.
“Their skill sets will have to evolve some more. They do deal with investors
and do some negotiations, but the board will have to share more power with
larger shareholders. This may hasten the change,” Romanek said.
shareholders at three additional companies followed suit, with the
shareholders at Air Products and Chemicals Inc.
-0.65%) (60% to
39%), Jacobs Engineering (68% to 29%), and Woodward Inc.
+1.73%) (57% to
39%) also demonstrating a preference for future votes to be held each year
instead of the management’s preference to hold the vote once every three
The shareholder advisory firm
ISS Proxy Advisory Services, formerly RiskMetrics, appeared to have a big
impact on the votes. At both Jacobs and Monsanto, for example, ISS
recommended that shareholders reject the pay packages of top executives. ISS
also recommended that shareholders have annual votes on pay at Jacobs,
Monsanto, Air Products and Woodward.
Also, a group of institutional
investors with $830 billion in assets also announced Feb. 1 that they want
corporations to have an annual vote on corporate pay packages.
Officials at Woodward, Jacobs
and Air Products did not return calls.
Ronald D. Orol is a MarketWatch reporter, based in
Copyright © 2011 MarketWatch, Inc.