Say On Executive Pay: What the 2012-13 Shareholder Vote Tells Us

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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") requires that publicly traded companies hold advisory "say-on-pay" proxy votes on executive compensation policies. The U.S. Securities and Exchange Commission adopted Rule 14a-21 requiring that say-on-pay votes occur at least once every three years and that companies also hold a shareholder "frequency" vote a minimum of once every six years to decide how often they want a "say-on-pay" vote. Proponents of "say-on-pay" votes argue that they offer shareholders valuable input to the company's board of directors, albeit advisory in nature, on proposed executive compensation packages.

Meridian Compensation Partners, LLC ("Meridian"), a U.S. and Canadian-based independent executive compensation consultancy, issued its Client Update (June 27, 2013) on the status of management "say-on-pay" proposals for the 2012-13 proxy season, the second full year of implementation of Dodd-Frank requirements. For the 2012-13 proxy season, Meridian researchers found that of the 1,896 Russell 3000 companies reporting vote results on "say-on-pay" proposals, only 44 companies failed to receive 50 percent, or majority, support from voting shareholders. These votes translate into 97.68 percent of all Russell 3000 ‘say-on-pay" proposals approved with majority support, while only 2.32 percent of proposals failed to receive 50 percent or more. Moreover, only four companies, Abercrombie & Fitch Co., Apache Corporation, Boston Properties, and Nabors Industries Ltd, of 401 companies in the Standard & Poor's 500 Index failed to garner majority voting shareholder support for their "say-on-pay" proposals. This Standard & Poor's vote tally translates into a 99.0 percent majority approval rating for "say-on-pay" proposals, versus 1.0 percent of "say-on-pay" proposals which were rejected by the majority of voting shareholders.

Institutional Shareholder Services (ISS), the largest proxy and shareholder advisement firm in the U.S., and acquired by MSCI Inc. in 2010, had issued vote recommendations in the 2012-13 proxy season for 1,974 Russell 3000 companies. Of these 1,974 companies, ISS recommended that shareholders vote against "say-on-pay" proposals for 264 companies, or 13.3 percent. While ISS has issued "no" votes on "say-on-pay" proposals of 252 Russell 3000 companies that have reported vote results through June 2013, only 44, or 17.5 percent, of these proposals were rejected by a majority of voting shareholders. Meridian analysts, however, note that these 252 companies typically had significantly depressed levels of shareholder support (a median vote of 67.6 percent and an average vote of 65.6 percent) relative to shareholder support at the 1,644 companies that received a "yes" ISS vote recommendation (a median vote of 96.5 percent and an average vote of 94.6 percent). A 29 percent differential in voter support translates into an ISS recommendation that carries significant, although not decisive, influence with shareholders on the "say-on-pay" vote.

In January 2013, The Conference Board, in collaboration with FactSet Research Systems Inc., released Proxy Voting Analytics (2008-2012), an analysis of shareholder voting in U.S. companies (using the Russell 3000, Standard & Poor's 500 Index, and data from 20 business industry groups) that held their annual meetings between January 1 and June 30 over the five year period of the study. This Conference Board study found that nearly 70 percent of 110 large and mid-size companies reported that their executive-pay practices are influenced by proxy advisory firms, such as ISS. "Generally, year-over-year comparison of [in this case, for 2011 and 2012] of voting results proved that "say-on-pay" can function as a catalyst to greater company awareness of current compensation issues as well as to more engagement and transparent communication with investors," says Matteo Tonello, Managing Director of Corporate Leadership at the Conference Board and co-author of the study.

Of the 1,896 companies that have reported their results of their "say-on-pay" vote in the past proxy season, Meridian reports that 76.0 percent reported they received 90 percent or more shareholder support; between a range of 70 and less than 90 percent support fell 15.7 percent of vote results; and between a range of 50 and less than 70 percent support were 6.0 percent of vote results -a category referred to as "yellow card" status. While there is little doubt that "say-on-pay" non-binding shareholder proxy votes are overwhelmingly approved, as reflected in the 97.68 percent majority approval in the Russell 3000 and 99.0 percent majority approval for the Standard & Poor's 500 for the 2012-13 proxy season, their impacts are felt by executives and boards in less public ways.

The "gold standard" for a successful shareholder "say-on-pay" vote, the category that all companies aspire to, is 90 percent and above. The next category, garnering between 70 and less than 90 percent shareholder support, is the true "warning" category for executives and the board of directors. This category vote result - if properly heeded - provides to both management and board members the "market signal" that can discourage a broadening of shareholder resistance to board compensation policies that can lead to a publicly embarrassing "yellow-card" vote on a "say-on-pay" vote the following year (given that a company has an annual vote) or even a majority shareholder rejection.

Avoiding a "discouraging" public vote of significant minority non-support is now requiring management to pro-actively engage with representatives of proxy advisory firms, major shareholders, and institutional and other shareholder blocs to mitigate or eliminate their grievances with proposed executive compensation policies. An example of this practice is mentioned in a recent Wall Street Journal article ("For Proxy Advisers, Influence Wanes", May 22, 2013): ... "ISS had opposed the technology company's [Hewlett-Packard Co.] pay practices this year, criticizing the board for not taking into account an $8.8 billion write-down related to a flawed acquisition when determining incentive awards. H-P modified its compensation plan just days before the annual meeting. ISS responded by dropping its negative recommendation."

Aaron Boyd, Director of Research at Equilar, a provider of consultancy services for executive and board compensation practices, and the firm responsible for the March release of the 2013 Say on Pay Warning Signs Report, accurately summarizes the true effect of "say-on-pay" votes on companies: "Although Say on Pay votes are non-binding, their impacts are significant as they've begun to reshape the way companies create, disclose, and communicate their executive compensation policies."

Thomas Hemphill ( is a policy advisor to The Heartland Institute, and professor of strategy, innovation and public policy, School of Management, University of Michigan at Flint. 

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