The coming proxy season will center on the votes on companies’ executive compensation plans that were mandated by Dodd-Frank. The three years of say-on-pay votes to date have resulted in a significant increase in companies’ efforts to reach out to investors to assess their views—and, if possible, influence their votes.
Compensation “tends to be a hot-button issue for management,” said Laura Richman, of counsel in the Chicago office of law firm Mayer Brown. “So just the existence of this advisory vote has increased shareholder engagement.”
With three years of experience with say-on-pay votes, “companies understand the playbook in terms of doing their shareholder outreach: that they need to do it earlier in the proxy process,” said Rajeev Kumar, senior managing director for corporate governance and research at Georgeson, a proxy solicitation and corporate governance consulting company. “They can’t wait until [proxy advisers] ISS and Glass Lewis come out with their recommendations and then try to get shareholders not to go along with their recommendations. They need to do outreach far earlier, even before they have filed their proxies.”
In fact, most companies’ say-on-pay measures sail to victory. According to Georgeson, such proposals averaged 90.3 percent support last year, up from 88.6 percent in 2012, and just 47 companies in the Russell 3000 failed to win majority approval in 2013, versus 51 in 2012.
Richman noted, though, that while a failed vote generally refers to one that garners less than 50 percent approval, ISS interprets approval levels from 50 percent to 70 percent “as a strong indication of shareholder dissatisfaction with the compensation program.
“Just 50 percent doesn’t get people all the way to where they want to be,” she said.
And winning a high level of approval for its compensation practices one year doesn’t mean that a company can rest on its laurels the next year, Richman said. Practices and opinions change, which is why keeping in touch with investors is important. “Companies have to be paying attention to how shareholders are likely to react, which is why you will see engagement throughout the year,” she said. “If you have a spring meeting, and over the summer you reach out to investors and see what their thoughts are and take those into account, you’ll be able to have an evolving model with this requirement of a vote in mind.”
Say-on-Pay Vote Tied to Relative Returns
The intersection of executive pay with the company’s performance is seen as a critical element in say-on-pay votes, but Georgeson’s research shows that total shareholder return relative to a company’s peers is a bigger factor than absolute return, Kumar said. “In fact, many of the companies that had a failed say-on-pay vote had a pretty good absolute stock price performance.”
Smaller companies are more likely to fail to win majority support than large companies, he said, attributing that fact to large companies’ greater experience with shareholder engagement and greater resources to support outreach.
The number of say-on-pay votes will jump this year, as companies that hold the vote on a triennial basis join those that give investors a vote on pay every year. Georgeson estimates about 20 percent of Russell 3000 companies have triennial votes.
“That just means institutional investors and proxy advisers are going to have less time for engagement on the issue this year,” said Richman. Companies should plan accordingly, she said, for example by reaching out to investors earlier.
The proxy proposals put forward by shareholders this year on governance, compensation, environmental, and social topics are expected to be similar to last year’s.
“The independent board chair proposal was big last year, and looking at what is pending this year, the independent board chair again is appearing at a lot of companies,” Kumar said.
While proxy proposals related to compensation slowed in the first two years of say-on-pay votes, they picked up last year, said Kumar, who's pictured at left. The two most popular were a measure that would prohibit accelerated vesting of options and another aimed at encouraging executive stock retention. “Those two accounted for almost 75 percent of compensation-related shareholder proposals last year,” he said. “We should see the same compensation-related proposals show up again.”
Proposals on “lobbying and political contributions are big,” Richman said. “You probably see more of those at the large-cap companies, but things do filter down to the midcap.” She added that some proxy proposals that used to be targeted mostly at large companies, such as those seeking majority voting for directors, are now being proposed at midcap companies.
Kumar cited two new types of proxy proposals he has seen this year. One is related to proxy voting and asks “that companies don’t have access to the running tallies of how the proposals are doing so that they can’t try to influence the vote outcome,” he said. Those proposals follow a furor last year when JPMorgan faced a proposal for an independent chair and a Wall Street lobbying group asked the organization compiling the votes not to disclose running tallies to the sponsor of the proposal.
“The other proposal stems from the SEC’s proposed rule relating to CEO pay ratio,” Kumar said. “There have been proposals requesting that the company limit executive pay to 99 times or 100 times the median worker [pay].”