In this podcast, Jim Kroll of Towers Watson discusses the latest developments in using supplemental proxy materials for say-on-pay votes (here’s our ongoing list of supplemental materials), including:
– How many companies have filed them so far this year?
– Is the approach that companies are taking any different than last year?
– What are the pros and cons of using supplemental materials?
We have been monitoring proxy statement disclosures made by S&P 500 companies pursuant to Item 402(b)(1)(vii) of Regulation S-K. That provision, which was added as part of the SEC’s say-on-pay rules, requires companies to discuss in the Compensation Discussion and Analysis (CD&A), “[w]hether and, if so, how the registrant has considered the results of the most recent shareholder advisory vote on executive compensation . . . in determining compensation policies and decisions and, if so, how that consideration has affected the registrant’s executive compensation decisions and policies.”
Of the 126 S&P 500 companies in our survey that, as March 14, 2012, had filed preliminary or definitive proxy materials that discussed the results of their 2011 advisory vote, 98% had received majority shareholder support for their 2011 advisory vote to approve their executive compensation. Our survey shows that companies are discussing their consideration of the results of the inaugural advisory vote in the following ways:
1. Every company in our survey stated that it had considered the results of the 2011 shareholder advisory vote on executive compensation. Two companies did not include the discussion in their CD&As, but those companies did discuss the 2011 advisory vote in other sections of their proxy statements.
2. A majority of companies (64%) discussed their consideration of their 2011 advisory vote under a separate caption in the CD&A.
3. Most companies (85%) stated the percentage level of support for their 2011 advisory vote.
4. With respect to the requirement to state how consideration of the 2011 advisory vote on executive compensation has affected executive compensation decisions and policies:
– All of the companies whose shareholders did not approve their executive compensation stated that they had made changes in response to the shareholder advisory vote.
– 16% of the companies whose shareholders approved their executive compensation stated that they had made changes in response to the shareholder advisory vote. This percentage has been increasing in recent weeks as more proxy statements are being filed. The companies making this disclosure generally received lower shareholder votes for their executive compensation (ranging from just over 50% to about 93% support, with a median of 70% support) than companies that did not announce changes in response to a favorable vote.
– A further 11% of companies whose shareholders approved their executive compensation stated, when discussing their 2011 advisory vote, that they had made changes to their compensation decisions or policies but did not state whether those changes were a result of their consideration of their 2011 advisory vote. The level of shareholder support for the executive compensation at companies that did not disclose changes to their executive compensation policies and decisions ranged from about 66% to more than 99%, with most of these companies reporting shareholder support between 90% and 100%.
5. About 46% of companies that did not disclose changes to executive compensation policies in response to a favorable advisory vote stated that shareholder support of their advisory vote was “an endorsement” (or similar language) of the company’s compensation policies.
6. As reflected by the statistics above, in addressing how consideration of the 2011 advisory vote has affected executive compensation decisions and policies, approximately 84% of the companies that received majority shareholder support for their 2011 advisory vote did not disclose changing their executive compensation policies and decisions as a result of the 2011 advisory vote. Of those companies:
– Approximately 45% of the companies affirmatively stated that after consideration of their 2011 advisory vote they did not change their executive compensation policies and practices.
– Approximately 30% of the companies stated that after consideration of their 2011 advisory vote they determined to continue or to maintain their executive compensation policies or practices.
– Approximately 25% of the companies did not affirmatively state whether or not their consideration of their 2011 advisory votes affected the company’s executive compensation decisions and policies. This percentage includes those companies that, when discussing their 2011 advisory vote, stated that the company made changes to compensation policies or practices in 2011, but did not expressly state that those changes reflected how consideration of the 2011 advisory vote affected the company’s executive compensation decisions and policies. However, other companies either are not expressly addressing the issue, or are being more subtle in addressing how consideration of their 2011 advisory vote affected the company’s executive compensation decisions and policies.
As noted in its Form 8-K, International Game Technology is the second company holding its annual meeting in 2012 to fail to gain majority support for its say-on-pay with only 44% voting in favor. A list of the Form 8-Ks filed by the “failed” companies is posted in our “Say-on-Pay” Practice Area.
By the way, Semler Brossy is putting out these excellent weekly updates on the say-on-pay votes, summarizing all the latest voting results – including how they jibe with proxy advisor recommendations – and analysis of specific situations. Towers Watson also has put out this excellent memo analyzing the early vote results and how they indicate what is in store for the remainder of the proxy season…
Now that we’ve already had one failed vote in 2012 – please take a moment to participate in this anonymous poll and express how you read the tea leaves for the number of failed say-on-pays to befall companies this year (last year, there were over 40 – many more than I expected, evident by how much I vastly underestimated the range of choices in last year’s poll):
Recently, Keith Bishop of Allen Matkins blogged about a new California bill that could require companies to disclose the compensation of their “five most highly compensated retired executive officers.” Keith’s blog is repeated below:
In 2002, the California legislature enacted the Corporate Disclosure Act to require publicly traded corporations and publicly traded foreign corporations qualified to transact intrastate business in California to file a statement of information with the California Secretary of State. Cal. Corp. Code §§ 1502.1 & 2117.1. For additional background on the CDA, see my article, California Joins the Parade: The California Disclosure Act, 16 Insights 21 (2002).
The Secretary of State has implemented an online search tool that allows the public to search and view these filings. Unfortunately, the information provided is a poor substitute for the information that these companies include in their filings with the SEC. Thus, the public is more likely to be misled than informed by the these California filings.
Rather than repeal this duplicative and decidedly unhelpful requirement, Senator Mark Leno has introduced legislation that signals an intent to expand it. Currently, SB 1208, consists of only of the following section:
SECTION 1. It is the intent of the Legislature to enact legislation that would require publicly traded corporations to report to the Secretary of State all forms of compensation, including pensions and benefits from other types of employee benefit plans, to the five most highly compensated retired executive officers of the corporation.
– CEO pay magnitude, along with poor total shareholder returns (TSR), helped drive investor dissent on 2011 “say on pay” resolutions.
– For example, average CEO bonuses for large capital, S&P 500 firms with low MSOP support stood at $3 million, compared with $1.1 million at higher supported peers.
– The value of “all-other-pay,” including perks and exit compensation, for CEOs at S&P 500 companies with low MSOP support was 138 percent greater than that for high support peers, while that for option grant values was 127 percent greater.
Tune in tomorrow for the webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Mike Kesner of Deloitte Consulting, Jan Koors of Pearl Meyer & Partners, Blair Jones of Semler Brossy and Eric Marquardt of Pay Governance “tell it like it is. . . and like it should be.”
Time permitting, the panel hopes to tackle all of these topics during the program:
– Weaknesses in ISS’ P4P assessment
– How ISS over values options
– Whether to consider ISS’s peer group in addition to their own
– How to best demonstrate pay/performance alignment (like Jan’s “right” pay and “right performance”)
– Rethinking severance (contracts, benefits, etc.) in a P4P world
– Whether to ‘fight’ a ISS recommendation with supplemental materials, etc.
– How and when to move away from a relative TSR program
– Whether to implement a clawback if they haven’t already
ISS would like to respond to the inaccuracies in the recent blog by Mike Kesner at Deloitte Consulting regarding ISS’ Governance Risk indicators (GRId) as follows:
To begin with, we would like to emphasize that every issuer has access to its own scores and ratings completely free of charge. This includes the company’s answers to every GRId question and an indication of their impact – positive, neutral, or negative. Each question’s impact on the scores and rating is described in the GRId 2.0 technical document (posted at www.issgovernance.com/grid-info). Together, the technical document and the online issuer data verification site provide a clear indication of the particular practices a company would want to target in order to improve its corporate governance profile (and thus its GRId score).
Mr. Kesner’s posting also mischaracterizes or misunderstands the GRId 2.0 scoring methodology. The goal of GRId is to flag governance-related concerns, and the new scoring system is therefore designed to ensure that important single factors – such as apparent pay-for-performance disconnects, excise-tax gross ups or modified single triggers – or important particular combinations of factors, such as equity granting practices that mitigate (or fail to mitigate) risk – are appropriately reflected in the overall level of concern.
As a result the scoring model is not purely linear – while category scores range from 0 to 100, with 75 being neutral, there are many more than 75 negative points and 25 positive points available within each category. We have paid a great deal of attention to the interaction of a company’s practices in each subsection and how practices either increase or mitigate levels of concern. In some cases (for instance, in the termination subsection), good practices may mitigate concerns seen elsewhere. In others (for instance, pay-for-performance), the absence of a concern does not mitigate concerns identified elsewhere. These interactions – both question-level concerns and the level of concern and/or mitigation available in each subsection – are detailed in the GRId 2.0 technical document.
Indeed, the scenarios described in the original posting are working as designed: it is appropriate that companies with apparent pay-for-performance misalignment raise a concern, even in the presence of good practices elsewhere. These good practices can mitigate but not eliminate the concerns raised under pay-for-performance. Conversely, companies that do not exhibit pay-for-performance misalignment may still receive low scores if there are other concerning practices such as modified single triggers, excise-tax gross ups, incomplete disclosure of performance metrics, etc.
Finally, issuers should know that they can view their scores and underlying data and submit updates at any time before their definitive proxy is filed through the free GRId data verification site. ISS will review any publicly disclosed changes to company governance practices and issue updated GRId scores and ratings, if appropriate, within five business days.
Here is a page with our technical document, issuer FAQs, and more information on the GRId data verification process.
According to this study by the Institute of Internal Auditors a while back, only 45.3% of respondent organizations conduct even limited reviews of the appropriateness of executive compensation and benefits and about one-third of such reviews are spearheaded by internal auditing. Moreover, the survey indicates that when conducting such reviews, internal auditors are most likely to focus on program compliance rather than on overall program design.
Personally, I’m not surprised given the expertise it would take to conduct a real review of compensation programs – expertise that internal auditors would not be likely to possess. Although I guess that’s true for most areas that internal auditors are called upon to review – that is one tough job…
I have fond memories of attending a ISS conference about seven years ago, with Disney’s brand new CEO Bob Iger delivering a memorable address on governance (Iger succeeded Michael Eisner not long after the Delaware Supreme Court’s famous executive pay decision). Now, as detailed in this WSJ article by Joann Lublin, Disney is fighting ISS hard over a negative say-on-pay recommendation having filed two separate pieces of supplemental proxy materials on March 1st. As noted in this Davis Polk blog, Disney’s SOP passed yesterday with 56.6% support.
Here are some thoughts from a member about this battle:
Disney is in a “no win” situation with ISS, as they are being compared to Winn Dixie, Best Buy and other consumer goods companies due to the lack of sufficient media companies. I think Disney’s approach of going direct to shareholders with their compensation rationale makes the most sense.
I also believe that companies have to do a much better job defining what pay for performance is, and not allow shareholders to fill the pay for performance void with ISS’ methodology, as it is fundamentally flawed. The ISS pay-for-performance model compares 1 and 3 year historic TSR to potential future compensation values ( i.e., grant date values of long-term incentives) that will be earned on future performance results.
ISS’ methodology is a bit like keeping score at today’s basketball game using the players average points the last three years. You do not win or lose today’s game based on how you scored in the past. If that was the case, why play the game at all? Same for compensation. If future performance did not matter, then why not just write the exec a check for the grant value and call it a day?
In the WSJ article, Joann Lublin tries to make the company’s desire to focus on realizable pay sound like some nefarious way to fool shareholders. But, if CalPERS gets it, then there is a good chance all shareholders will come around and consider realizable pay and performance is far better than using grant date values.