Say-on-Pay Support Hits Record High in 2014

Backing for management’s pay policies still strong, disappointing shareholder activists

By Stephen Miller, CEBS Jul 14, 2014

updated July 30, 2014

As the 2014 proxy season comes to a close, U.S. shareholders’ support for management’s executive pay policies remains overwhelming, according to data released by Institutional Shareholder Services (ISS), a proxy advisory firm.

The findings—which look at U.S. companies in the Russell 3,000 broad stock market index that held annual meetings during the first half of the year—reveal that:

Management say-on-pay proposals hit a record high of 2,229 in 2014, a 14.4 percent jump in the volume of advisory pay votes from 1,948 in 2013.

Average support level for the 2014 management say-on-pay proposals were at a record 91.7 percent of votes cast, up slightly from 91.5 percent in 2013 and 90.7 percent in 2012.

Only 51 of the 2,229 proposals (about 2.3 percent) failed to win majority shareholder backing.

Required but Not Binding

Nonbinding say-on-pay votes on executive pay are required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The U.S. Securities and Exchange Commission’s say-on-pay rules required public companies to allow shareholders to vote on the frequency of say-on-pay votes (annual, biennial or triennial), with a two-year exemption granted to smaller public companies that expired in 2013.

“The 2014 proxy season proved challenging for many institutional investors evaluating portfolio company pay, due to the confluence of annual, triennial and smaller company votes for the first time since market-wide say-on-pay was implemented” in 2011, said Sean Quinn, executive director and head of the ISS Governance Institute, in a news release.

“Despite the volume, average voting support was at its highest level since 2011, suggesting companies are continuing to respond affirmatively to investors’ calls for a tighter link between pay and performance and underscores the efficacy of growing engagement between shareholders and corporations to head off issues before the vote,” said Quinn.

Activists Disappointed

As a column on the 2014 proxy season by senior editor John Carney observes, “This isn’t how things were supposed to work out,” adding:

From its very beginning, the "say on pay" movement was an attempt to reduce executive pay. Instead, since becoming a requirement for all public companies in 2011, "say on pay" has led to the routine endorsement of C-suite compensation. In fact, it may even be encouraging rising pay for top executives who can now point to direct shareholder approval of their pay packages.

Carney suggests, “Perhaps shareholders just never shared the conviction of self-styled

shareholder advocates that executives were overpaid.”

S&P 500 CEOs’ Cash Compensation Up 5% in 2013,

Mostly from Performance Incentives

Total cash compensation for S&P 500 CEOs rose 5 percent in 2013, according to Mercer. CEOs earned a median $2,958,000 with approximately 40 percent of the value coming from base salary and 60 percent from short-term incentives.

As in 2012, over 50 percent of companies in the S&P 500 froze their CEO’s base salaries in 2013, which now stand at a median of $1,092,000. “This slower rate of growth is the result of board decisions to shift marginal increases in compensation to performance-based vehicles,” said David Cross, a partner with Mercer’s executive rewards practice. “This does not necessarily mean salaries won’t rise in the future, but that salary will become a smaller part of the compensation package relative to variable pay.”

The shrinking contribution of base salary to total direct compensation in 2013 continues a long-term trend:

In 2011-2012, base salary comprised 14 percent of S&P 500 CEO salary; it now comprises 13 percent.

The decrease is most notable in the smaller S&P 500 companies, where the portion of base salary slid from 16 percent in 2011 to 15 percent in 2012 and 14 percent in 2013.

For the 100 largest S&P 500 companies, base salary remained relatively flat at 10 percent of total compensation for all three years.

No Room for Complacency

Commenting on the ISS data, consultancy Towers Watson noted that a lack of rigor in tying pay to performance remained a primary factor driving shareholder opposition to say-on-pay resolutions. Discretionary bonus awards and a perceived lack of rigorous performance hurdles were cited most frequently as the issues raising concerns in this area.

Most common pay-for-performance concerns cited by ISS in recommending against say-on-pay resolutions:

Source: Towers Watson Executive Compensation Resources. Based on 265 companies that received an “against” recommendation from ISS through June 2014. Total exceeds 100 percent because companies can fall into more than one category.

Of the roughly 2 percent of companies that failed say on pay in 2014, about a third failed another vote within the previous three years.

Similar to last year, Russell 3000 companies outside the S&P 1500 accounted for the highest proportion of failed say-on-pay votes. Mid-cap companies had the largest increase in the proportion of say-on-pay failures, as 29 percent of failed votes came from this group, up from 14 percent of the 2013 failed votes.

Vigilance Pays

“Companies that receive strong support for their pay programs should remember that, as with stock returns, past performance is not an indicator of future say-on-pay success,” Towers Watson commented on the ISS findings. “A quarter of the companies that failed say on pay in 2014 had achieved support above 90 percent in the previous three years. And almost a third (32 percent) of the current Russell 3000 have received an “against” recommendation for say on pay from ISS at least once in the past four years.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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