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Partner [email protected] 212-921-9364 Shaun Bisman
Principal [email protected] 212-921-9365
Measured through September 2, 2011, 455 of the S&P 500 companies included Say on Pay resolutions in either a preliminary or definitive proxy statement, and vote results from annual meetings were available for 438 of these companies (96%). Therefore, with the first season of Say on Pay votes in the U.S. nearly complete, we found this an apt time to discuss certain themes that have emerged:
- Going forward, a Say on Pay vote will be an annual event at most companies
- A simple majority should not be considered a passing grade
- Companies with stronger performance generally received higher levels of shareholder support
- Say on Pay voting has already been a catalyst for change
As background, on January 25, 2011, the SEC issued final rules implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which generally provides shareholders of US public companies with the right to cast three types of advisory votes related to executive compensation:
- A vote to approve the compensation of the Named Executive Officers (NEOs), effective for shareholder meetings occurring on or after January 21, 2011;
- A vote on the frequency with which shareholders should be entitled to cast Say on Pay votes (every one, two or three years), effective for shareholder meetings occurring on or after January 21, 2011; and
- A vote on golden parachute arrangements for NEOs related to a sale, consolidation or merger, effective April 25, 2011.
Say on Pay Frequency Vote Results (2011 Proxy Season)
An annual vote frequency has emerged as the clear shareholder preference. Among 93% of S&P 500 companies reporting vote results, a majority of shareholders supported annual Say on Pay vote frequency. This differs from vote recommendations, where only 68% of the companies had recommended an annual vote.
Company Recommendation (n=455)
|Vote Frequency||# of Companies||% of Companies|
Vote Results: Received Majority Shareholder Support (n=438)
|Vote Frequency||# of Companies||% of Companies|
|None (only plurality)1||7||2%|
The strong support for annual votes is not a surprise. 39 institutional investors, representing more than $830 billion in assets, issued a public call for companies and investors to support annual advisory votes on executive compensation in 2011 proxy statements. Similarly, a number of major mutual funds have also indicated support for annual Say on Pay votes, and ISS’ policy recommends that shareholders support annual votes (Glass Lewis has indicated a similar preference).2
Say on Pay Vote Results (2011 Proxy Season)
Say on Pay resolutions received majority shareholder support at all but eight S&P 500 companies, with average support of 89% (most companies received greater than 80% support for their NEO pay program).3
|%inFavor||#of Companies||%of Companies||Average1-Yr TSR @12/31/10||A “threshold” for acceptable passage rates seems to have emerged; to-date, results indicate this threshold is around 80% shareholder support.|
As shown above, companies with stronger TSR on a 1-year basis generally received a higher level of support from shareholders on their executive pay programs.
The eight companies where a majority of shareholders did not support the executive compensation program, and the Say on Pay vote results for these companies, are:
|Company||1-Yr TSR||% Votes in Favor|
|Freeport-McMoran Copper & Gold||52.6%||45.5%|
|Janus Capital Group||-3.2%||40.1%|
|Constellation Energy Group||-10.3%||38.0%|
|Stanley Black and Decker||32.7%||38.0%|
Impact of Proxy Advisor Recommendations
On average, shareholder support for Say on Pay votes was considerably lower when ISS recommended an “Against” vote to shareholders.4,5
As shown below, companies that received an “Against” vote recommendation from ISS generally had lower TSR.
|ISS Vote Recommendation||# Companies that Passed||# Companies that Failed||Total||Average 1-Yr TSR @ 12/31/10|
Responding to Proxy Advisor Recommendations
Some notable companies took additional steps related to executive compensation during this proxy season, filing supplementary soliciting materials and/or making last minute modifications to their CEO pay program. Select examples include: General Electric, Disney, ExxonMobil, Johnson & Johnson, Hewlett-Packard, Lockheed Martin, and Northern Trust. While these filings were generally in reaction to negative vote recommendations from shareholder advisory services such as ISS, ExxonMobil went a step further by filing supplementary materials (essentially an executive pay brochure) on the same day as the proxy. ExxonMobil still received a negative vote recommendation from ISS, and later filed additional soliciting material rebutting ISS’ vote recommendation.
During the 2011 proxy season, a clear shareholder preference for annual Say on Pay votes emerged. In terms of the actual Say on Pay vote, an 80% threshold emerged as an “acceptable” level of shareholder support, a significantly higher hurdle than simple a pass / fail test.
Say on Pay has already been a catalyst for change. Companies are more willing to address controversial pay practices than they were a year earlier. Disclosure of executive compensation in proxy statements has evolved, and the influence of proxy/shareholder advisory services (such as ISS) has increased.
Looking forward, companies will need to carefully evaluate their Say on Pay vote result from the 2011 proxy season, and determine how to best incorporate any findings into planning for 2012.