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CFO Journal. (The Wall Street Journal Digital Network), February 21, 2012 article



February 21, 2012, 7:01 PM ET

‘Say on Pay’ Changes Ways



[Emily Chasan]

Emily Chasan
Senior Editor

Companies that failed to win the support of a majority of shareholders last year in advisory votes on executive pay are working hard to avoid an embarrassing repeat as annual meeting season begins again.

Already two of those companies—technical-services firm Jacobs Engineering Group Inc. and home builder Beazer Homes USA Inc.–have persuaded shareholders to support them this year. Their efforts to align executive pay with performance underscore how seriously companies take “say on pay” votes.


Since the piece of the Dodd-Frank law requiring public companies to put their compensation practices to a non-binding shareholder vote went into effect in January 2011, some 45 publicly held U.S. companies—or less than 2%—have received negative votes from a majority of shareholders, according to Institutional Shareholder Services (ISS), the top U.S. proxy advisory firm.

The low proportion of negative majority votes, coupled with an increase in overall compensation for chief executives last year, has led some corporate-governance advocates to claim the law was toothless. But over the past year, the boards of many of the companies that failed the votes have spent hours talking with long-term shareholders. Many have hired outside compensation consultants and proxy solicitors and some have made broader management changes that could help remedy performance issues at the heart of some shareholder concerns about pay.

“The vote is a way for shareholders to say ‘We’re not happy,’ not just on pay, but also on performance,” said Francis Byrd, leader of Laurel Hill Advisory Group’s Corporate Governance/ Risk Advisory Practice.

Executive turnover at companies that failed say-on-pay last year is about twice as high as overall turnover. Excluding two companies that were sold, about one in four of the companies that failed say-on-pay in 2011 installed a new CEO after the vote, and one in five have a new chief financial officer, according to a review by The Wall Street Journal. That compares to an overall CEO turnover rate of about 9% a year, according to The Wall Street Journal/Hay Group 2010 CEO Compensation Study, and a CFO turnover rate of about 12%, according to executive recruiter Korn/Ferry International.

A handful of the companies also made changes in their boards of directors, appointing a new chairman or lead director.

The failed votes on pay were a very public way for shareholders to express their displeasure with a company’s long-term performance. “This wasn’t something that just came out of the blue for the companies that failed,” said Mark Borges, an executive-pay consultant at Compensia Inc. “The vote became a catalyst for companies to say that our problem runs deeper than just a poorly designed compensation program.”

Worried about aggravating the risks to their reputation and the potential for shareholder lawsuits, boards at many of the companies that failed say-on-pay votes last year are treating this year’s vote “like preparing for the SAT,” said James Hatch, a partner at accounting firm EisnerAmper LLP, who helps boards of directors design compensation packages. Many companies worried about negative votes have tried to make sure that at least 50% of their executive-pay packages are linked to performance measures this year, Messrs. Hatch and Borges said.

At Beazer’s Feb. 7 annual meeting, the company won more than 95% of the shareholder vote on say-on-pay after it met with investors, hired a new compensation consultant, and clarified its compensation policies. “We went to great lengths to enhance the disclosure we included” in the company’s proxy statement, said spokeswoman Carey Phelps. Beazer adopted a new performance-based stock plan and stopped giving out automatic restricted stock grants based on executive tenure, rather than performance.

In June, the company also promoted Alan Merrill to CEO from CFO. Former CEO Ian McCarthy left the company following a settlement with the U.S. Securities and Exchange Commission in which he agreed to repay $6.5 million and return company stock after he was unduly compensated, based on fraudulent financial statements the company filed for fiscal 2006. Neither Beazer nor Mr. McCarthy admitted to any wrongdoing in the settlement.

Jacobs Engineering won 96% approval from shareholders at its meeting on Jan. 26, up from 45% a year earlier. According to the company’s proxy, Jacobs met with investors following the say-on-pay vote, decreased its use of stock options and made stock grants more performance based. The company didn’t respond to requests for comment.

ISS said both companies had addressed pay-for-performance issues after their failed 2011 votes and recommended its clients vote in favor of the companies in say-on-pay votes this year. Retirement system TIAA-CREF, which oversees $440 billion in assets, changed its vote to support both companies on pay this year, saying it was happy with the changes at Jacobs and had a “productive” discussion with Beazer.

But not all shareholders were convinced. The California State Teachers’ Retirement System, which voted against both companies in 2011, did so again this year.

“We’re looking over a one-, three- and five-year time frame,” said Aeisha Mastagni, an investment officer at CalSTRS. “When we see executives still getting large bonuses and severance packages and the stock price hasn’t recovered, it just doesn’t translate for us.”

CalSTRS voted against compensation packages at about 23% of the 2,166 say-on-pay votes in which it took part in 2011, mostly citing pay-for-performance concerns. CalSTRS and TIAA-CREF said contact with companies increased sharply after they sent letters to the board of each company they voted against.

ISS said it will be looking closely at whether companies discussed their pay practices with shareholders and made changes at firms that failed say-on-pay last year, but also at companies that won less than 70% support. Only one company, industrial-machinery maker Actuant Corp . has failed a say-on-pay vote so far this year, but it was the company’s first Dodd-Frank mandated vote. Of the 127 companies about which ISS has issued 2012 proxy season recommendations through mid-February, about 11% were for shareholders to vote “against,” say-on-pay, on pace with last year at this time, said ISS spokesman Ted Allen.

Among the companies that failed say-on-pay votes last year, governance advocates said they will be closely watching Hewlett-Packard Co.’s annual meeting on March 21 and Cincinnati Bell Inc.’s meeting in May. Last September, H-P replaced CEO Leo Apotheker with CEO Meg Whitman, who is earning a salary of $1 per year. The company said in its proxy this month that it has had “substantial ongoing discussions” on executive pay over the past year with more than 200 of its biggest shareholders and tried to make its compensation package more performance-based.

As part of a shareholder suit settlement over the company’s failed say-on-pay vote last year, Cincinnati Bell agreed to better explain in its proxy how its pay related to performance and how it has addressed the results of last year’s vote. It also agreed to rotate independent members of its compensation committee and hire a new compensation consultant if it fails again.


Copyright ©2012 Dow Jones & Company, Inc. All Rights Reserved




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