Pomerantz LLP

Say on Pay is Having Its Day

Pomerantz Monitor, March/April 2012

Although only 45 companies – less than 2% of all publicly held companies – lost “say on pay” votes last year, the Wall Street Journal reports that many of those companies are going out of their way to do better this year. Jacobs Engineering and Beezer Homes, for example, have already obtained approval, after revamping executive pay, to bring it into better alignment with overall corporate performance. Beezer, in particular, got a new CEO, hired a new compensation consulting firm and adopted a new performance-based stock plan that stopped giving executives automatic restricted stock grants, and went to great lengths to consult with investors about compensation. As a result, at its annual meeting in February it received 95% shareholder approval of its pay plans. Jacobs did much the same thing (though it kept its CEO) and increased its shareholder “yea” vote from 45% last year to 96% at its annual meeting in January of this year.
Executive turnover at loser companies has been roughly twice the average rate. About 1 in 4 installed a new CEO after the vote, and about 1 in 5 put in a new CFO, both more than double the average turnover rate.
Corporate governance mavens will be looking ahead to votes later this spring at other loser companies from last year, including Hewlett Packard and Cincinnati Bell. H-P has a new CEO, Meg Whitman, who is pulling in $1 in compensation, and has reportedly held compensation discussions with 200 or so of its nearest and dearest institutional investor shareholders, in an effort to tie compensation more closely to corporate performance. Cincinnati Bell, which was sued by shareholders after losing last year’s vote, agreed to revamp disclosures and to dump its compensation consultants if it loses another say on pay vote.
The effect of say on pay votes is largely attributable to the attention that Institutional Investor Services (“ISS”), the proxy advisory firm, has been paying to this issue. The WSJ reports that a study published in the journal Financial Management concluded that a negative ISS recommendation on a management proposal influences between 13.6% and 20.6% of investor votes; and in 2011, ISS advised investors to vote “no” on pay proposals about 11% of the time. Some are predicting that the ISS will say “no” far more often this year than last. In one highly publicized incident, ISS got into a brawl with Disney over its pay packages. Disney won this won, by aggressively fighting back.
Also amplifying the impact of “say on pay” votes is the SEC ruling that executive compensation matters fall into the “Broker May Not Vote” category under its Rule 452. That means that brokers, who tend to vote reflexively with management, cannot vote shares held by their investor customers, if those customers have not sent them instructions on how to vote. This means that companies will have to work that much harder to secure investor “yea” votes on compensation.