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Say on Pay Results Are In
Shareholders want annual input on executive compensation, preliminary vote totals reveal.
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Although votes are still being tallied as the 2011 proxy season moves into full swing, early results show two clear trends in this year’s say-on-pay and say-on-frequency ballots, according to ISS Voting Analytics, a division of MSCI Inc. (MSCI) subsidiary Institutional Shareholder Services, or ISS: The vast majority of shareholders support their corporate boards’ executive compensation policies, but they want the option to review those policies annually, not every three years as some companies recommended.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires public companies to hold a nonbinding shareholder advisory vote on executive compensation — that is, grant shareholders a say on pay. Under the legislation’s say-on-frequency provision, that vote must take place every one, two or three years, depending on what the shareholders decide.
At the start of the proxy season, issuers were recommending triennial votes by a 2-to-1 margin, according to ISS. Shareholders had a different idea, though, instead voting in favor of annual votes. Through mid-April, the average approval for annual say-on-pay votes was 63.6 percent — more than twice the 30.4 percent support for triennial.
That message that investors are favoring annual votes has come through loud and clear for companies that will hold their annual meetings later in the year, says Larry Schumer, a principal at Buck Consultants, a Xerox Corp. (XRX) company, who advises public companies on compensation issues. Since those early first-quarter votes, the large majority of companies now filing proxy statements are recommending annual votes. “I give management a lot of credit,” Schumer says. “They listened, and the shareholders are going to be happy about that.”
The bright spot for management is that most issuers so far have received wide support for their pay practices. Management say-on-pay proposals are averaging 91 percent support, according to ISS, based on results from approximately 200 companies with early meetings. In fact, a handful of notable rejections notwithstanding, the vast majority of companies are doing a very good job with compensation, Schumer says, because they are effectively tying it to performance, which is what shareholders want to see.
“It’s all about the linkage of pay and performance,” Schumer notes. The companies that did not garner shareholder support for their compensation packages generally fell short of that measure, often by linking equity awards to tenure instead of performance, he explains. And that’s what boards need to be watching closely as this proxy season heats up, Schumer adds. “To the extent that the equity program includes a large component of performance-based equity incentives,” he says, “I think that goes a long way with shareholders.”
