Companies implement ‘say on pay’ rules

“Say on pay … is literally sucking all the oxygen out of the room,” said Patrick McGurn, special counsel at ISS Governance, the governance research and proxy-voting advisory unit of MSCI Inc. “Say on pay, just in terms of ballot volume and the amount of time spent on engagement and analyzing these issues, is going to squeeze out just about everything else except for high-profile proxy fights and contested [director] elections.”

Although the non-binding say-on-pay votes dominate the corporate-governance landscape, other requirements for public corporations are taking effect this year, as well.

Shareholders will have a vote at every company on “say on when,” or the frequency of conducting a say-on-pay vote — an element of the Dodd-Frank Act. The requirement became effective Jan. 21 when the Securities and Exchange Commission adopted implementation rules.

GOLDEN PARACHUTES

In addition, as of April 25, corporations are required to give shareholders a say on “golden parachute” severance arrangements to comply with an SEC rule implementing a Dodd-Frank provision.

Corporations seeking shareholder approval of a merger or acquisition transaction are required to disclose golden parachutes of top executives and conduct separate shareholder votes to approve deal-related compensation arrangements.

The say-on-when and say-on-parachute votes also aren’t binding on companies.

Shareholders early in the proxy voting season are strongly endorsing companies’ compensation practices, even as executive pay rebounds.

“Compensation for CEOs has returned to levels we haven’t seen since before the [2008] economic crisis,” Doug Friske, global head of executive compensation consulting at Towers Watson & Co., said in a statement.

The median total compensation of chief executives at the largest U.S. corporations rose 9% last year, according to a Towers Watson analysis of proxy statements as of April 4. In 2009, median total direct compensation decreased 1%.

Total direct compensation includes total cash compensation plus the grant value of long-term incentives such as stock options, restricted stock and long-term performance plans.

Total 2010 cash compensation for chief executives, which includes base salary as well as annual and discretionary bonuses, increased a median 17%, up from a 3% median increase in 2009.

“The fact that CEO pay declined or remained flat in years when corporate profits were weak, and then rebounded when profits and the stock market recovered, clearly demonstrates that the pay-for-performance model is working,” Mr. Friske said.

As of April 4, executive compensation arrangements had won more than 90% of shareholder support in say-on-pay votes at 75% of the 146 companies that had reported voting results, according to Towers Watson data.

Shareholders, though they generally support management on pay, have indicated that they want to keep a close watch on it by favoring annual votes on executive compensation, rather than once every two or three years as allowed under Dodd-Frank.

“At large-cap companies, the board recommendations [are] overwhelmingly” for conducting annual say-on-pay votes, Mr. McGurn said.

But some, including the C$100 billion ($104 billion) Ontario Teachers’ Pension Plan, support having say-on-pay votes at companies every three years to avoid focusing on short-term objectives.

“Our concern with an annual advisory vote on compensation is that it may compel boards to adjust compensation programs every year to demonstrate that they are effectively managing the compensation process,” Neil Petroff, executive vice president for investments and chief investment officer, and Wayne Kozun, senior vice president for public equities, wrote in a policy statement sent to more than 650 public companies.

“We believe this approach could lead to a focus on short-term objectives rather than on more stable, long-term objectives, or lead to inconsistencies in the compensation program without a clear long-term focus,” according to the statement.

SAY-ON-PAY

BlackRock Inc. generally supports a three-year frequency for say-on-pay voting, while Fidelity Investments, ISS Governance and TIAA-CREF support an annual vote, according to their policies.

For golden parachutes, shareholders generally didn’t get a direct vote on them as part of M&A transactions, Mr. McGurn said.

“A lot of times, you are inherently voting on that in connection with the underlying transaction,” he said.

For years, shareholders have asked companies to put excessive parachute payments up for a vote, often a binding one, Mr. McGurn said. So the vote on golden parachutes “has been a long-standing wish list item” for shareholders, he said.

In general, Mr. McGurn thinks that say-on-pay is constructive in moving companies to align their executive compensation practices with shareholder interests.

Based on companies outside the United States, where non-binding say-on-pay votes have been permitted for a number of years, “we found it to be a process to shed more light than heat on compensation issues,” he said. “It doesn’t necessitate investors’ unseating members of the board.”

Other investors, such as BlackRock, respond at least indirectly to fury over pay practices by putting heat on directors. When BlackRock shareholders oppose misaligned pay-for-performance arrangements, they withhold votes for the members of the compensation committee of the company’s board, according to BlackRock’s policy statement.

“As a result, our say-on-pay vote is likely to correspond with our vote on the directors who are compensation committee members responsible for making compensation decisions,” according to the statement.

At Hewlett-Packard Co., Beazer Homes USA Inc., Jacobs Engineering Group Inc. and Shuffle Master Inc. this proxy season, shareholders rejected the executive compensation in say-on-pay votes. By contrast, last year, three companies failed to get a majority support in advisory votes on executive compensation.

H-P VOTING

Lawrence T. Babbio Jr., HP’s director and chairman of its compensation committee, received the highest shareholder opposition vote among HP directors at 39%. Other members of the board received favorable votes at least close to the 80% level.

But at Beazer, Jacobs and Shuffle Master, there were relatively few votes against directors.

“That would indicate most investors are using say-on-pay as their exclusive avenue indicting their displeasure with pay, rather than doubling up and voting against members of the board,” Mr. McGurn said.

If shareholders’ pay concerns aren’t addressed, it may be that next year, “investors will consider voting against members of the compensation committee,” he said.

Overall during this proxy season, shareholder proposals of all types, including those withdrawn, likely will be fewer than 1,000 for the first time since about 2003, Mr. McGurn said. They numbered about 700 as of late March.

As many as 370 social proposals, including environmental, employment and political contribution issues, almost outpace governance proposals, including compensation, board and CEO issues. Typically, in a proxy season, shareholder governance proposals outnumber shareholder social proposals by 2-to-1.

The shift has largely to do with the disappearance of shareholder proposals, calling for companies to conduct say-on-pay votes, because of the Dodd-Frank voting requirement.

The largest number of shareholder proposals concern the disclosure of corporate political contributions, at 77. None had been voted on as of March 28.

Last year, shareholders introduced 56 such proposals; the average vote in support was 25%.

Sixty-four proposals call for a majority vote to elect directors. At Apple Inc. and Patriot Scientific Corp., shareholders voted 73.6% and 80.6%, respectively, in favor, while at Selectica Inc., they voted 80% in favor.

Some 70% of companies in the S&P 500 had majority-voting provisions as of last June, according to recent ISS Governance data, up from 59% a year earlier. Among S&P 1500 companies, which include those in the S&P 500, 36% had majority voting, up from 31% a year earlier

Shareholders have introduced 63 proposals on compensation issues, compared with last year’s 175, including 77 say-on-pay resolutions.

Only at Navistar International Corp. and Walgreen Co. have they gone to a vote, producing 31.7% and 42.6%, respectively, in support.

Barry B. Burr is a reporter at sister publication Pensions & Investments.

Related Topics: Compensation