Season Review: 'Say on Pay'
During the first year of
advisory votes on executive compensation under the Dodd-Frank Act, investors
have overwhelmingly endorsed companies' pay programs, providing 91.2 percent
support on average (based on "for" and "against" votes).
This support exceeds the
89.6 percent average approval in 2010, when "say on pay" votes were mandated
only at U.S. government-supported financial firms. While the median total
compensation for CEOs at S&P 500 firms increased by more than 33 percent
last year, those pay increases haven't translated into more shareholder
opposition, in part because of greater engagement by issuers. Dozens of
companies have released supplemental proxy materials to address investor
concerns or made late changes to their pay practices to win shareholder
So far this season, S&P 500
companies have averaged 88.6 percent support, which is slightly less than
the 91.8 percent approval for issuers in the Russell 3000 index, according
to ISS data as of June 14. At the sector level, large-cap industrial
companies had the lowest average support of 87.1 percent, while large
consumer retail firms received the highest approval at 90.7 percent. Large
financial firms, which traditionally have received more scrutiny over pay,
had the second-highest approval average of 89.7 percent. Within the Russell
3000 index, the energy sector received the lowest level of average support
(88.8 percent), while consumer retail firms again received the highest
average approval (92.8 percent).
So far this year,
shareholders have voted down management "say on pay" proposals at 36
companies, or just 1.7 percent of the almost 2,200 companies in the Russell
3000 index that have reported vote results. Eleven of these firms received
less than 40 percent of the votes cast "for" and "against." Overall, eight
S&P 500 companies and 28 Russell 3000 firms have failed to receive the
required vote for approval of their executive pay programs. Among the latest
issuers to report failed votes are Freeport McMoRan Copper & Gold,
Monolithic Power Systems, and Premiere Global
The primary driver of these
failed votes appears to be pay-for-performance concerns, which were
identified at 26 of these companies. Investors appear to have voted their
pocketbooks this season. Almost half all of the failed-vote firms have
reported double-digit negative three-year total share returns. Also
contributing to investor dissent were such issues as tax gross-ups,
discretionary bonuses, inappropriate peer benchmarking, excessive pay, and
failure to address significant opposition to compensation committee members
in the past.
The greatest number of
failed advisory votes--about 25 percent--have occurred in the energy sector,
where companies such as Helix Energy Solutions,
Cadiz, Superior Energy Services, and
Constellation Energy received some of the lowest levels of
shareholder support. At Constellation, shareholder support was only 38.6
percent, which appears to be due to pay-for-performance concerns at the
company. CEO Mayo Shattuck's total compensation increased 137 percent, from
$6.7 million in 2009 to almost $16 million in 2010. Meanwhile, the company's
one- and three-year total shareholder returns were negative 10.3 percent and
negative 30.6 percent, respectively. Shattuck's total pay increase was due
to a significant increase in his deferred compensation and pension value,
and in the value of stock options granted to him.
Consumer retail companies
also saw a greater share of dissent, with 20 percent of the total failed
votes in this sector. Shareholders expressed significant opposition at
homebuilders NVR, Beazer Homes USA, and
M.D.C. Holdings, as well at Shuffle Master,
Nutrisystem, and Talbots. At M.D.C.
Holdings, concern over pay-for-performance issues resulted in shareholder
support of just 33.9 percent.
The health care sector had
the lowest percentage of failed pay votes, with only one company's proposal
failing to pass. At Cutera Inc., it appears that investors
had concerns over pay-for-performance issues and the board's responsiveness
to shareholders. Cutera's CEO received a total pay increase of 33.4 percent
in 2010, due to an increase in the value of non-performance-based equity
granted to him. In addition, the company conducted a stock option exchange
without shareholder approval, despite the fact that shareholders voted not
to approve an option exchange program in 2009.
Other well-known companies
with failed "say on pay" votes this year include: Stanley Black &
Decker (outsized time-based and guaranteed equity award, and
failure to address low voting support for two compensation committee members
in 2010); Nabors Industries (pay-for-performance concerns,
coupled with pay significantly above the peer median);
Hewlett-Packard (concerns over the new CEO's hire package in
conjunction with a track record of generous severance payments for departing
executives, and the CEO's participation in selecting new board members);
Janus Capital Group (outsized sign-on bonus for the new
CEO, despite lagging shareholder returns); Jacobs Engineering Group
(pay-for-performance concerns), Masco
(pay-for-performance); and Freeport-McMoRan (concerns regarding the CEO's
incentive pay structure and excessive compensation).
In addition to the failed
votes, 34 companies received between 50 and 60 percent support for their pay
practices, and most likely will face greater shareholder scrutiny next year.
Among those firms were Chesapeake Energy, Safeway,
Lazard, Amgen, Devon Energy, and
The American Federation of
State, County, and Municipal Employees (AFSCME), which has long been active
on compensation issues, waged "vote no" campaigns against the pay practices
at five S&P 500 companies: Pfizer, Johnson & Johnson, Alcoa,
ConocoPhillips, and ExxonMobil. Four of the firms
received significant opposition; support at Pfizer and ConocoPhillips was
less than 60 percent, while Johnson & Johnson and Exxon Mobil received less
than 70 percent approval. Alcoa, which made late changes to its pay
practices to win investor support, received 84.2 percent approval, which
came close to the 88.6 percent average for S&P 500 companies.
AFSCME primarily raised
pay-for-performance concerns at several of the targeted companies, as well
as other issues such as severance arrangements and pay magnitude concerns.
At Pfizer, AFSCME argued that a $4.5 million exit payment for retiring CEO
Jeffrey Kindler, despite lagging shareholder returns during his tenure,
raised concerns regarding the company's adherence to a pay-for-performance
philosophy. At ConocoPhillips, the company provided for the payment of
excise tax gross-ups in severance arrangements with two new executives, and
continued the practice of crediting certain executives with additional years
of service under its supplemental retirement plan.
Also on this season's
ballots were separate Dodd-Frank-mandated votes on the frequency of future
"say on pay" votes. So far, shareholders have overwhelmingly supported an
annual frequency. As of June 20, annual votes have garnered majority (or
plurality) support at 1,658 companies, as compared to triennial votes, which
won the greatest support at 378 companies, and biennial votes, which
received the most support at just 15 firms.
recommendations on pay vote frequency shifted throughout proxy season. In
the early part of proxy season, from March to mid-April, management
recommendations shifted away from triennial votes and toward annual votes,
following early investor support for an annual frequency. Recommendations
finally stabilized in late May, with approximately 53.3 percent of companies
recommending annual votes, with 41.6 percent endorsing triennial votes.
Recommendations for biennial votes decreased throughout proxy season,
stabilizing at around 2.5 percent. However, these management preferences did
not have much influence on the outcome of these frequency votes; investors
have defied management recommendations for triennial votes at 515 of 850
companies so far, according to ISS data.
Because of "say on pay" and
frequency votes, companies have done significantly more engagement on
compensation issues this year. A number of companies made late changes to
their compensation programs or filed additional proxy materials to win
shareholder support, including Walt Disney Co., General Electric,
Collective Brands, and Assured Guaranty Ltd. At
least 50 issuers have made additional filings to address investor concerns
and proxy advisers' recommendations. In most cases, the companies objected
to the industry peer groups and option-valuation methods used by the proxy
In a June 10
speech to the Social Investment Forum, SEC Commissioner Luis Aguilar
observed that advisory votes appear to be facilitating an increase in
communication between issuers and shareholders, and has resulted in positive
changes to many companies' executive pay practices.
"Many companies are putting
in more performance-based compensation plans and they are addressing items
that shareholders often criticized, such as: excessive severance; perks;
federal income tax payments; and pensions. For example, approximately 40 of
the Fortune 100 companies have eliminated policies that had the company pay
certain tax liabilities of executives," said Aguilar, who also mentioned the
positive changes by General Electric.
"There seems to be real
evidence that say-on-pay is one catalyst to increasing shareholder
engagement more broadly," Aguilar said.
Overall, ISS has
recommended against "say on pay" proposals at 11 percent of U.S. companies
that have held advisory votes this year. Within the Russell 3000 index, ISS
recommended against 12.6 percent of companies' compensation practices. For
the S&P 500 index, ISS issued negative "say on pay" recommendations at 15
percent of the companies. --Jolene Dugan, U.S. Research
Edward Kamonjoh, ISS
Specialty Research, contributed to this article.
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