The Advisors' Blog

– Broc Romanek, CompensationStandards.com

Here’s news from ISS’s Ted Allen in his blog: The Council of Institutional Investors (CII) released a report that addresses how institutional investors approached “say on pay” votes during the spring 2011 U.S. proxy season. As expected, most investors said “pay-for-performance” disconnects were a major reason for voting against corporate compensation practices.

The investor group hired Farient Advisors, which interviewed 19 CII members about how they cast their “say on pay” votes. These investor participants consisted mostly of public pension systems (58 percent), mutual fund firms (32 percent), and union pension funds (11 percent).

Investors gave various reasons for opposing corporate pay practices, but the factors most frequently cited were:

– A disconnect between pay and performance (92 percent)
– Poor pay practices (57 percent).
– Poor disclosure (35 percent).
– Inappropriately high level of compensation for the company’s size, industry, and performance (16 percent).

The report’s other findings include:

– Investors were extremely thoughtful about evaluating executive compensation for “say on pay” votes
– Due to resource constraints, investors used proxy advisory firms’ analyses to varying degrees.
– Investors considered multiple factors as well as inputs from various sources in determining their say-on-pay votes.
– Investors evaluated performance and pay over multiple years, and focused primarily on total absolute shareholder return (TSR) over one-, three- and five-year periods.
– Investors spent the most time and resources analyzing pay at “outlier” companies: those with large disconnects between pay and performance, high overall pay and/or low TSR in comparison to their industry or peers.
– Investors focused on CEO pay, rather than the pay of other NEOs, and on the overall “reasonableness” of the level of compensation in view of the company’s size, industry, and performance.
– Investors mostly regarded the “say on pay” vote as an opportunity to voice their concerns about a particular pay program, not a referendum on directors’ oversight of compensation.

The report also had this observation: “This first year of mandatory say on pay has been a learning experience for all participants. Farient encourages investors to conduct a ‘post-mortem’ of their voting processes, including an assessment of any additional resources needed to evaluate ‘say on pay’ proposals fairly and efficiently. Concerned investors should follow up to see what steps, if any, companies take in response to failed ‘say on pay’ proposals, and consider appropriate action.”