February 7, 2012
CalSTRS Releases Review of Say-on-Pay Votes
– Broc Romanek, CompensationStandards.com
Here’s something that ISS’s Ted Allen blogged last week:
The California State Teachers’ Retirement System (CalSTRS), the second-largest U.S. public pension fund, has released a report, “Lessons Learned: the Inaugural Year of Say-on-Pay,” that details its experience during the first year of marketwide U.S. advisory votes in 2011.
CalSTRS reported that it voted against 23 percent of the 2,166 management say-on-pay proposals that it considered between Jan. 3 and June 30, 2011. The predominant reason for the pension fund’s opposition was a pay-for-performance disconnect. Other reasons included: a pay disparity between CEO compensation and that of other named executives (43 percent of CalSTRS’ negative votes); CEO base pay above a $1 million (38 percent); and auto-renewing executive employment contracts (12 percent), according to a CalSTRS analysis of a sample set of 120 companies.
“We believe that poorly structured pay packages harm shareholder value by unfairly enriching executives at the expense of owners–the shareholders. On the other hand, a well-aligned compensation package motivates executives to perform at their best. This benefits all shareholders,” according to CalSTRS, which had a portfolio valued at $144.8 billion as of Dec. 31, 2011.
While noting that the compensation discussions in proxy statements are “largely too complex and lengthy for the average investor,” the pension giant praised the many companies in 2011 that provided “short and simple executive summaries which described in ‘plain English’ the companies’ approach to compensation.”
At the same time, CalSTRS expressed concern about companies that have used peer benchmarking to rachet up pay, and said this issue would be a “renewed focus” in the future. “Although peer groups can be a helpful check to determine if the internal structure and policy setting of pay is reasonable and competitive, peers should not be the starting point when structuring pay. CalSTRS found it especially troubling when companies targeted pay above the median, particularly when companies targeted the 75th or 90th percentile. When pay is initially targeted at these above-average levels, it sets the base pay at above-average levels. As a consequence we saw companies over paying for on-par or below-average performance,” the report said.