May 4, 2011
Analysis: Different Strategies for Say-on-Pay Votes
– Mark Poerio, Paul Hastings
Here is a quick note about strategies that companies are taking with respect to this year’s “say-on-pay” advisory vote on their executive compensation:
Defuse Proxy Red Flags – Extraordinary items in the Summary Compensation Table are one common thread among the 10 “no” votes so far in 2011. For example:
– At Stanley Black and Decker, 2010 total compensation for all executives was 3 to 4 times the level reported for 2009. The company’s executive summary in its proxy statement did not address this directly.
– At Shuffle Master, the disclosure of several lucrative severance arrangements proved exceptional, while 2010 bonuses were conspicuously high and criticized at Beazer Homes, Umqua Holdings, and several others.
– Several “no” votes have arisen from poor pay-for-performance correlations, with 85% of the unfavorable recommendations from ISS being rooted in failure of its stock performance test, based on one-year and three-year total shareholder returns). ISS has issued unfavorable recommendations for 11% of filed proxy statements, per a recent study by Semler Bossy.
For all of the above vulnerabilities, a primary 14A defense should involve use of an executive summary to introduce the CD&A with a convincing justification – by reference to corporate performance or circumstances – for the compensation disclosed in the summary compensation table (here’s information about all of the “no” votes to date in 2011).
Get Out in Front of the Message – ExxonMobil and Goldman Sachs have issued additional definitive proxy materials in order to highlight and justify their executive compensation and governance practices.
Respond to Negative Voting Recommendations or Outcomes – The ISS performance test is vulnerable to being criticized as too blunt an instrument, and it is becoming more and more common for public companies to take issue with ISS:
– through filing additional proxy materials (e.g. Disney), or
– by justifying the board’s decision-making in the Form 8-K reporting its unfavorable say on pay vote (e.g. Umqua Holdings).
For general executive compensation information, don’t forget my site, ExecutiveLoyalty.org