Strong Shareholder Support for Say on Pay in 4th Year

Companies are eliminating shareholder irritants and highlighting performance-based incentives

By Stephen Miller, CEBS Apr 24, 2014

The fourth year for mandatory say-on-pay votes is off to a relatively positive start, based on Towers Watson’s analysis of proxy statements. Among publicly traded U.S. companies that disclosed their shareholder voting results in the first quarter of 2014:

  • Shareholder support averaged 92 percent—higher than in each of the first three years.

  • Fewer companies are receiving negative say-on-pay voting recommendations from proxy advisors.

“Most companies are managing their executive compensation programs thoughtfully, responding to continuing pressure from stakeholders to ensure a strong link between pay and performance,” said Todd Lippincott, North America leader of executive compensation consulting at Towers Watson.

Fifteen percent of companies provided detailed disclosure in their proxy statement's Compensation Discussion and Analysis section of measures they took to engage with shareholders regarding executive compensation. Half of those companies made changes in their pay programs or disclosures in response to shareholder feedback.

“Companies have been adapting their executive compensation programs for the say-on-pay environment by eliminating pay irritants, such as tax gross-ups and excessive perquisites, and increasing the emphasis on performance-based incentives,” Lippincott said. “We expect this proxy season to be relatively quiet, although there will always be a few companies where shareholders voice their displeasure through say-on-pay votes.”

The analysis, based on S&P 1500 companies that filed by late March proxies disclosing 2013 pay, noted that:

  • CEO salaries increased 2.7 percent in 2013, roughly the same as in 2012, while target annual bonuses increased 3 percent at the median.

  • Target long-term incentives, the largest component of executive pay in major companies, increased 3.3 percent at the median in 2013, down from an increase of 9.8 percent in 2012.

The analysis also found that the mix of executive long-term incentives continues to shift to performance-based plans:

  • Nearly 8 in 10 companies (78 percent) awarded performance-based long-term incentive awards in 2013, compared with 67 percent in 2011.

  • 58 percent of companies awarded stock options in 2013, down from 64 percent in 2011.

Total shareholder return remains the most prevalent performance metric that companies use in their long-term incentive plans. Four in 10 companies (39 percent) that offer performance awards used this measure in 2013, while 32 percent used earnings per share.

Pay Programs Align with Proxy Advisors’ Guidelines

A new study by Mercer finds that the impact of proxy advisory firms—which provide institutional shareholders with voting recommendations—is increasing as more organizations try to align programs with advisors’ guidelines.

According to the consultancy's annual Executive Rewards Survey report—based on responses from more than 215 employers across all industries throughout the U.S. and Canada—changes to short- and long-term incentive programs, use of special retention grants, and grant values have increased in 2014 as a result of proxy advisors’ guidelines.

One notable change in plan designs on which both the Towers Watson and Mercer analyses concur is the continued shift away from stock options relative to the increased use of performance awards in delivering long-term incentives to executives. Mercer's findings show that few organizations are making changes to current stock option plans, while 10 percent of organizations are planning to increase the use of performance shares in 2014 and 5 percent are increasing use of restricted stock. (For more on this trend, see the SHRM Online article "Managing a Shift Away from Stock Options.")

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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