The Advisors' Blog

– Ira Kay and Steve Seelig, Watson Wyatt Worldwide

We enjoyed reading Broc’s posting of John Wilcox’s views of the benefits of mandating “Say on Pay” votes for the plans disclosed in a company’s proxy. Mind you, this is not a vote on the magnitude of the pay packages themselves, or whatever shareholders might think they are voting on if a blanket “Say on Pay” vote was mandated; John is simply suggesting a vote that would permit shareholders to tell the company if the plans they disclose in their proxy make sense and are properly disclosed. And John comes from an organization that “gets it” about how to write a proxy disclosure – TIAA-CREF absolutely “walks the walk” on making sure its own proxy disclosures are as transparent as they possibly could be.

While our firm remains on the sidelines regarding whether a Say on Pay vote, or John’s modest proposal, will accomplish the goals being sought, we agree wholeheartedly that many companies have fallen far short in telling shareholders how their plans actually accomplish the illusive goal of providing ‘pay for performance.” Search any proxy. You will invariably find the company touting its “pay for performance” story, with very few actually proving it. We found this to be a common failing when we performed out 2nd Annual “Report on Proxy Statement CD&A Compliance.”

We have been recommending that companies do their best to prove their case, and include the results right at the start of their CD&A in an Executive Summary so investors immediately can know:

– How the company performed for the year,
– How the company paid for those results,
– How corporate performance compared to peers, and
– How their pay compared to peers.

While we acknowledge calculating and accumulating these results can be burdensome, we believe companies owe it to their shareholders to explain these results up front. You know, something that catches people’s attention, like: “It was the best of times, it was the worst of times.”

Of course, the problem in assembling our Executive Summary is that it is based on sound analysis. And our survey found that companies have not taken the time to do the work – as encouraged by the SEC – to explain the type of performance their plans are designed to reward. We found:

– Only 46% of the companies disclosed long-term incentive compensation earned in 2007 for attaining plan goals during the 2005-2007 cycle.
– Slightly more than half – 56% – described in detail the link between total pay earned during 2007 and company performance.
– Only 36% compared the company’s performance with the performances of its industry peers.

Although roughly half of companies provided some analysis that linked pay to corporate performance, most did not provide a detailed comparison of the pay earned by their executives with the pay earned by peers. This omission leaves these companies vulnerable to criticism from institutional investors and other pay critics that their pay programs are not solidly grounded in performance.