Observations on Responsible Use of “Say
The comments below were requested of Daniel Summerfield to
provide Forum participants with a summary of the observations he offered
during one of the recent workshop discussions of issues to be addressed at
the Forum’s open meeting this Thursday,
Dr. Summerfield’s comments include a must-read example of the kind of
research and communications that can make “Say on Pay” work constructively,
for both investors and corporate managers. It shows clearly that “Say on
Pay” can be more than a tool for confrontational grandstanding or a path to
bureaucratized decision-making. And it will also give you a sense of the
resources and processes that will be needed to support this more
constructive use of “Say on Pay” in the US marketplace.
Those of you who can attend Thursday’s meeting are encouraged to consider
Dr. Summerfield’s observations in your thinking about what an investor will
need to deal responsibly with the expected new “Say on Pay” duties, in very
practical terms of information and communication processes, so that we can
develop plans to address those needs.
GL – November 28, 2008
Lutin & Company
575 Madison Avenue, 10th Floor
New York, New York 10022
November 25, 2008
for a ‘Say on Pay’ - Lessons from the UK
USS is a keen advocate of the need to introduce a ‘Say on Pay’ system in the
US. Although not a panacea, in and of itself, in the UK it has produced a
significant improvement in the degree of interaction between companies and
investors on the issue of executive compensation. Enhanced engagement can
indeed provide an opportunity for companies to gauge shareholders’ views in
advance of a company meeting and can be used to avoid any unpleasant
surprises. As it now looks likely that ‘Say on Pay’ will be introduced in
the US with a new administration coming into power, it is important to
understand the potential implications for investors.
underestimate the amount of work involved in the consultation process.
If done properly, the increase in number of executive compensation
consultations and the analysis of proposals can be a very resource
intensive exercise. The UK’s Association of British Insurers (ABI)
estimates that consultations initiated by companies before they finalise
compensation plans has tripled in recent years.
Ensure that there are sufficient resources available to meet the increased
This could be undertaken in conjunction with other investors by, for
example, appointing a specialist remuneration consultant to work on behalf
of pension funds.
not expect to be able to rely on proxy voting agencies re: consultations. The
consultations are often conducted in private and are very company
consider executive compensation within the context of the company’s
There is a need to consider company and sector specific information and
ensure incentives are linked to strategic objectives and execution and
value drivers within the company.
provide explanations to companies when voting against.
Investors need to be able to provide explanations and alternative
proposals if they expect companies to address concerns.
on the issue of reward for performance and not just on avoiding rewards
– ie.,what sort of behaviors are investors seeking to encourage and over
what sort of time frame.
Beware of the temptation to set specific guidelines on accepted targets as
they will come back to haunt you.
This was done in the UK with regard to acceptable EPS targets.
aware of a move towards cookie-cutter type approaches to compensation by
This is where companies are tempted to take off-the-shelf remuneration
solutions provided by remuneration consultants.
encourage all investee companies to address executive compensation
just ones with poor performance records.
Pension funds should ensure that their fund managers are addressing this
issue properly and are adequately resourced.
In summary it is important not to underestimate the challenges involved if
and when ‘Say on Pay’ is introduced. On the whole, and if the engagement
tool is utilized properly by both companies and investors, there are
significant benefits to be accrued by all parties concerned.
Dr Daniel Summerfield
Co-Head of Responsible Investment
Universities Superannuation Scheme (USS)
London EC2M 3XD
November 27, 2008
…I have attached a cover
letter and an
analysis of a UK retail company’s executive compensation arrangements
which was sent, following a meeting and request, to the Comp Chair.
This should serve as an example of:
Opportunities that should present themselves, with the introduction of
‘Say on Pay’, to influence exec comp
The increased interaction between investors and companies and directors on
The amount of extra work involved and need for additional resources if
The need to be very company and sector specific and focus on strategic
objectives and value drivers when looking at exec comp
The importance of collaboration
The need to integrate exec comp into the investment process (note: head of
USS’s UK equities was a signatory to this letter)