Say-on-pay gets serious response from investors in first US season

The proxy season is over in the US and the results are in. In the first year under the new rules mandated by the Dodd-Frank Act, investors have the right to a non-binding vote on the pay of the CEO and certain named executive officers, called NEOs in the new parlance. Overwhelmingly the pay arrangements this year won shareholder support. But among several thousand companies involved in the first season were a handful where investors voted against. The Council of Institutional Investors, a strong proponent of "say on pay", commissioned an analysis of those to find out what happened. The study, conducted by Farient Advisors, looked at 37 cases where pay packages fell short of majority support. It also looked at another 37 cases where "against" votes reached 40 to 50 per cent. "While 37 'failed' votes is a tiny fraction (less than 2 percent) of the 2,340 say-on-pay votes at U.S. companies in the first half of the year, the total was surprisingly large compared with the track record of say on pay in other countries and the expectations of corporate governance professionals," CII commented. So why did investors object?

Farient found that investors cast votes against executive compensation at the 37 companies for a variety of reasons, but the factors most frequently cited were:

• Discrepancies: A disconnect between pay and performance (92 per cent of the cases cited this as a reason).
• Poor process: Poor pay practices (57 per cent).
• Disclosure gaps: Poor disclosure (35 per cent).
• Disproportion: Inappropriately high level of compensation for the company’s size, industry and performance (16 per cent).

"Investors were extremely thoughtful about evaluating executive compensation for say-on-pay votes," the report concluded. Resource constraints meant that investors used proxy advisory firms' analyses a lot, but to varying degrees. They also evaluated performance and pay over multiple years, and focused on total absolute shareholder return (TSR) over one-, three- and five-year periods. Investors also focused on CEO pay, rather than the pay of other NEOs, and on the overall "reasonableness" of the level of pay.

Source document: The CII report is a 36-page pdf file.