The Advisors' Blog

– Subodh Mishra, ISS Governance Exchange

Companies have fared modestly better in 2013 than in 2012 with regard to shareholder support for their pay policies and practices, according to an ISS analysis of voting results through July 1. Across the full Russell 3000 index, average support has increased over calendar 2012 by roughly one-half percentage point to 91.3 percent, while the number of votes with less than majority support has declined to 45 from 52 during the first six months of the year for 2013 and 2012, respectively. Still, not all companies are seeing gains, with smaller firms–defined herein as Russell 3000 companies falling below the S&P 1500–in fact showing less support this year than last, albeit by just basis points.

The decline in support at smaller companies this year is matched by an increase in concerns over pay-for-performance, as defined by ISS, and, consequently, “against” recommendations by the proxy adviser. In fact, “high” levels of concern tied to pay-for-performance were evidenced at 13.6 percent of companies tracked in the first half of 2013, nearly one point more than during the same period last year. Moreover, smaller companies saw an uptick in the portion receiving “against” recommendations, which saw a 1.5 point jump in 2013.

By comparison, S&P500 companies saw declines in both concerns over pay-for-performance and ISS “against” recommendations on advisory pay votes. With respect to the former, “high” levels of concern dropped 4.1 percentage points to 8.5 percent in 2013, while adverse recommendations similarly declined by 3.6 point to 10.3 percent of 416 large capital companies analyzed thus far in 2013. The distribution among indices of failed votes also has tilted toward smaller companies this year compared with 2011 and 2012.

Russell 3000 firms falling below the S&P1500 make up fully one-half of all failed votes to date in 2013, compared with 29.8 percent in calendar 2012 and 22.2 percent in 2011.
Taken together, these trends suggest larger companies are doing more to conform pay policies and practices to that deemed ideal by shareholders, while, concurrently, investors are sharpening their focus on smaller portfolio companies’ compensation structures.

By sector, average support levels increased across the board, save for Consumer Discretionary and Telecommunications Services Firms, where declines were evidenced in 2013. Financials, meanwhile, saw no year-over-year change from 2012. Consumer Discretionary firms saw average support dip largely on the back of three firms, including two–Abercrombie & Fitch and The Children’s Place Retail Stores–where support languished in the teens, and at Morgans Hotel Group, which netted just 27.4 percent support. The Telecommunication Services sector, which represents a relatively small universe of firms relative to others, was weighed down by Cogent Communications Group and Level 3 Communications, where voting support tallied 39.7 and 54.2 percent, respectively. All other firms in the sector saw support in excess of 80 percent.

The distribution of companies with higher levels of say-on-pay voting support also showed improvement in 2013, with more than 78 percent of companies seeing approval of 90 percent or more. By comparison, that figure stood at 74.7 percent during the same period in 2012. Offsetting the swelling ranks of companies in the highest support-level band were fewer companies in the 70 to 90 percent range and those without majority support. Companies with support between 50 and 70 percent was static year-over-year at roughly 5.7 percent of the total.