With the advent of corporate "say-on-pay" votes in the U.S. in 2011 as required under the Dodd-Frank Act, much focus has been placed on the role of total shareholder return in determining shareholder support or opposition to the nonbinding management resolutions. Yet while total shareholder return is widely seen as the most critical driver of votes, CEO pay magnitude also played a significant role, according to a white paper published by corporate governance rating firm ISS Corporate Services.
The white paper, Parsing the Vote: CEO Pay Characteristics Relative to Shareholder Dissent, looks at factors that contributed to investor opposition during say-on-pay votes at U.S. companies in 2011. When looking at industry sectors where a disproportionate number of companies saw less than 70 percent support for their say-on-pay resolution, ISS found that total shareholder return likely could not account for the high level of opposition given that performance in some cases was at or above median total shareholder return levels for more highly supported peers.
Backing the assertion that pay magnitude resulted in higher levels of opposition during the inaugural year of say on pay, the ISS analysis found that:
• CEO pay disparities are stark when isolating for companies that received less than 70 percent approval on 2011 say-on-pay resolutions compared with those that saw support in excess of 95 percent.
• The average CEO bonuses for S&P 500 firms with low say-on-pay support for management stood at $3 million compared with $1.1 million at higher-supported peers.
• The value of other pay, including perks and exit compensation, for CEOs at S&P 500 companies with low support for management was 138 percent greater than that for high-support peers while option grant values at the low-support firms were 127 percent greater.
• By industry, companies in the energy, consumer discretionary, materials and telecommunications sectors were overrepresented among those with low support levels. Poorly supported energy sector firms reported bonuses that were 664 percent greater than those of their highly supported peers and stock grants that were valued 338 percent more. Telecommunications companies receiving low support outpaced high-supported peers on all-other-pay by 653 percent.
"The trend toward greater scrutiny of pay magnitude will continue as [say-on-pay] resolutions move into their second year in the U.S.," the report concluded. "Moreover, investors appear far more ready in 2012 to challenge and oppose significant payments under their right to approve or reject nonbinding measures on both pay and golden parachutes. Taken collectively, issuers should be better prepared to justify significant awards to their shareholders in the run-up to the 2012 annual meeting season."
A Concurring Study
Companies that give their CEOs high pay opportunities are more likely to receive lower levels of shareholder support for their say-on-pay votes than those with smaller pay opportunities, according to an analysis released in March 2012 by consultancy Towers Watson. The study found that the likelihood of receiving lower levels of shareholder support triples for companies with poor performance compared to those that are top performers.
Towers Watson found that:
• Almost one out of three companies (32 percent) with high CEO pay opportunities (in the top quartile) received low say-on-pay shareholder support (below 70 percent) during the 2011 proxy season, compared to only one out of five companies (19 percent) with CEO pay opportunity at or near the median.
• Companies that performed poorly (bottom one-third in total shareholder return [TSR]) were more than three times as likely (34 percent) to receive less than 70 percent shareholder support for say on pay, regardless of their pay levels, than were companies with top levels of TSR (10 percent).
The findings are based on a Towers Watson review of pay data of 728 companies from publicly available proxy filings from 2008-2010 and a review of shareholder voting results in 2011.
“While say-on-pay votes primarily reflect absolute levels of pay for companies with high pay levels, they can become say-on-performance votes when companies do poorly in generating shareholder returns,” said Todd Lippincott, leader of Towers Watson’s executive compensation consulting business for the Americas. “The strong connection among say-on-pay outcomes, executive pay opportunities and shareholder returns indicates that other efforts like eliminating certain pay practices, such as change-in-control tax gross-ups, may have a limited impact on say-on-pay voting results. Based on our research, it appears that companies that target high pay opportunities run a much greater risk of unacceptable voting outcomes than companies that target median pay levels.”
The study found companies with high CEO pay opportunities in 2008 and 2009 received similar levels of shareholder support, regardless of whether they changed pay levels for 2010. In addition:
• Slightly more than three-quarters (78 percent) of companies that lowered pay for 2010 received acceptable shareholder support levels (more than 70 percent), compared to just less than three-fourths (74 percent) of those that kept pay at high levels.
• However, companies with median pay levels for 2008 and 2009 that increased their CEO pay opportunities to high levels during 2010 saw reduced shareholder support for their say-on-pay votes, with just less than two-thirds of those having done so receiving acceptable shareholder support.
“It will be interesting to see how say-on-pay voting plays out in the 2012 proxy season, given that many companies had strong operating results last year, while their share prices and shareholder returns were flat,” said Lippincott. “Clearly, our research confirms that shareholder votes are strongly influenced both by the sheer size of the pay opportunity and the sensitivity of pay to performance, which many investors equate with shareholder returns.”
Executive Pay Programs Stabilize, Reflecting Best Practices, SHRM Online Compensation Discipline, March 2012
Fewer Companies Offer CEOs Perks and Incentives, SHRM Online Compensation Discipline, February 2012
Game Plan: The Next Say-on-Pay Vote Might Not Be as Easy to Win, SHRM Online Compensation Discipline, January 2012
Companies Work to Achieve Positive Say-on-Pay Votes, SHRM Online Compensation Discipline, August 2011
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