Last week, four more companies filed Form 8-Ks reporting failed say-on-pay votes – and a fifth reported a near failure. The companies that failed were: Stewart Information Services (48%); Dex One (48%); NVR (44%); and Penn Virginia (39%). The near failure is well described by Mark Borges in his “Proxy Disclosure Blog“: “Cooper Industries reports that its “Say on Pay” proposal was approved by a vote of 50.36% – 49.64%. While the company indicates in its proxy statement that abstentions are not to be considered votes cast at the annual meeting (and, thus, have no impact on the vote’s outcome), there were over 2 million abstentions recorded. Had they been considered “negative” votes, the proposal would have been defeated, 50.4% 0 49.6%. Needless to say, the company would be well advised to pay close attention to its shareholders’ concerns about its executive compensation program.”
Less Than Four Days Left for Early Bird: Our Say-on-Pay Intensive Conference Lineup – We have announced the line-up for our annual package of executive pay conferences to be held on November 1st-2nd in San Francisco and by video webcast: “Tackling Your 2012 Compensation Disclosures: 6th Annual Proxy Disclosure Conference” and “The Say-on-Pay Workshop Conference: 8th Annual Executive Compensation Conference.” Save 25% by registering by May 13 at our early-bird discount rates.
Recently, it was noted during our “The Proxy Solicitors Speak” webcast that companies shouldn’t necessarily rely on proxy statements as their primary messaging vehicle when it comes to say-on-pay. In his IR Web Report, Dominic Jones really drives this point home – particularly with his examples of doing a Google search with the search terms being your company’s name and “executive compensation.” I strongly urge you to read Dominic’s piece.
Over on TheCorporateCounsel.net Blog, I recently blogged about the relative dearth of pre-proposal comments – a project that the SEC set up after Dodd-Frank in an effort to get input even before they put out proposals. However, I do note that the AFL-CIO submitted this comment letter about Section 953(b) of Dodd-Frank, which is the section that deals with internal pay disparity disclosures (the same section that was recently the focus of a House hearing and a House Republican bill to repeal).
You should also note that, as ISS’s Ted Allen notes in this blog, the AFL-CIO recently began a campaign to urge shareholders to vote on say-on-pay as it launched its Executive PayWatch site for 2011 – and there is an internal pay disparity component to it. Ted’s blog is repeated below:
The AFL-CIO has launched the 2011 version of its Executive PayWatch Web site and is urging investors to help rein in CEO pay by participating in the advisory votes on compensation that all large and mid-cap companies will hold this year. “Although non-binding, it’s the first time that shareholders have had this opportunity,” Richard Trumka, president of the AFL-CIO, said at a press conference on Tuesday. The labor federation is analzying corporate pay disclosures and plans to vote against the compensation practices at some companies, but hasn’t publicly identified those firms. An AFL-CIO affiliate, the American Federation of State, County, and Municipal Employees, has launched a “vote no” campaign against the pay practices at Pfizer and Johnson & Johnson.
The PayWatch site features a searchable database that includes CEO pay information from 299 S&P 500 companies that have filed proxy materials. According to the labor federation, the average 2010 compensation at those firms was $11.4 million, up 23 percent from 2009. On average, these pay packages included $3.8 million in stock awards, $2.4 million in stock options, $2.4 million in non-equity incentive plan compensation, $1.2 million in pension and deferred compensation, $1.1 million in salary, a $251,413 bonus, and $215,911 in other compensation. Trumka said the average total compensation for S&P 500 CEOs is now about 343 times that of the average American worker, up from 42 times in 1980. “We believe that executive pay has gotten out of whack,” he said.
AFL-CIO officials also expressed concern that House Republicans had introduced legislation to repeal another Dodd-Frank Act provision that would require companies to disclose the ratio between the total compensation received by the CEO and the median pay received by the firm’s employees. Corporate advocates have denounced this provision, arguing that it would be extremely costly to collect this data, and that the foreign and part-time employees should be excluded from this calculation. Trumka denounced this attempt to “water down” Dodd-Frank and said this pay ratio disclosure “would have a profound impact” and prod boards to set compensation based on a company’s own organizational needs, rather than based on the pay at other companies.
The SEC has not yet proposed rules to implement this provision but plans to do later during the second half of the year. The AFL-CIO is urging the commission to require companies to include both their foreign and part-time workers in the pay ratio calculations. The AFL-CIO’s Paywatch site specifically criticized the pay practices of six companies: Occidental Petroleum, Hewlett-Packard, Reynolds American, Rite Aid, Abercrombie & Fitch, and PulteGroup.
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
Last week, MDC Holdings filed this Form 8-K to report that it became the 11th company to fail to gain majority support for its say-on-pay, with only 34% voting in favor. In addition, Janus Capital Group filed this Form 8-K – with only 41% voting in favor – to become the 12th company with a failed say-on-pay. We continue to maintain our list of links to Form 8-Ks filed by companies with a failed SOP in our “Say-on-Pay” Practice Area.
Last week, Cogent Communications filed this Form 8-K to report that it became the 10th company to fail to gain majority support for its say-on-pay, with only 39% voting in favor. Ted Allen’s blog provides some analysis, including noting significant levels of “no” votes at Pfizer and Johnson & Johnson (both of whom are S&P 500 companies).
Less Than Two Weeks Left for Early Bird: Our Say-on-Pay Intensive Conference Lineup – We have announced the line-up for our annual package of executive pay conferences to be held on November 1st-2nd in San Francisco and by video webcast: “Tackling Your 2012 Compensation Disclosures: 6th Annual Proxy Disclosure Conference” and “The Say-on-Pay Workshop Conference: 8th Annual Executive Compensation Conference.” Save 25% by registering by May 13 at our early-bird discount rates.
Recently, TK Kerstetter of Corporate Board Member expressed his opinion that directors are underpaid. Earlier this week, he wrote this blog entitled “Directors Still Shy About Giving Themselves Raises.” I’m not sure where TK is getting his data from, but we haven’t seen any studies for this proxy season yet as the proxy disclosures are just rolling in now – and the data from last year (comparing 2010 to 2009 levels) revealed that boards received double digit (11%) raises on average when comparing total values of director compensation. That surely isn’t bad in a poor economy – and I predict the 2010-2011 comparison will also reveal a significant move upwards. [My data is pulled from Frederic W. Cook & Co.’s latest report on director compensation that compares the Nasdaq 100 vs. NYSE 100 for 2010.]
As reflected in TK’s blog, some argue that boards are doing more now so their pay levels should be adjusted upwards. But that doesn’t take into account that boards likely were overpaid in the past – so perhaps now they are finally earning what they make. $228,00 per year for a very part-time job isn’t bad (this is the median amount for 2010 noted in the Cook report). Go back a decade and talk to anyone who spent significant time in the boardroom and you’ll hear plenty of stories about how boards did very little before the advent of governance reforms and shareholder pressures directed towards them since the turn of the century. Consider that only a handful of companies had written procedures & policies (ie. corporate governance guidelines) about how their boards operate a decade ago. That says a lot about how seriously many boards took their role back then in my opinion.
And I strongly urge boards not to fall into the trap of relying solely on peer group studies to determine how much they should pay themselves. This would be repeating history as this type of benchmarking is one of the major causes of excessive CEO pay – the slippery slope upwards as everyone wants to be paid in the top quartile (who would say “we are a bad board and so should be paid at the bottom”?). Not to mention all the other perils of peer benchmarking, such as manipulating the data (as noted in the recent study). Common sense needs to prevail. Boards don’t need raises because “everyone else is doing it” without considering the sizable amounts they already earn for the fairly limited tasks they perform.
Ed Hauder of ExeQuity has updated his “Burn Rate Calculator” for the 2011 ISS burn rate caps and he notes that since Fidelity has apparently abandoned dilution in favor of 3-year average burn rate, which the Burn Rate Calculator also calculates for you, you might find some use for it.
Yesterday, Navigant Consulting filed this Form 8-K to report that it became the 9th company to fail to gain majority support for its say-on-pay, with only 45% voting in favor. Ted Allen’s blog provides some analysis.
Transcript: “What the Top Compensation Consultants Are NOW Telling Compensation Committees”
We have posted the transcript for the CompensationStandards.com webcast: Transcript: “What the Top Compensation Consultants Are NOW Telling Compensation Committees.”
Probably the most interesting development that happened while I was on vaca last week was the one noted by Mike Melbinger in his blog. Mike blogged about how some of the first companies to fail to receive majority support on their SOP have been sued (as well as their compensation committee members and even their compensation consultants) in shareholder derivative suits. Not only have the early failures of this proxy season been sued, but two of the companies that failed last year were sued (one case has been settled and one is still pending). We have begun to collect the pleadings from these cases for our “Say-on-Pay” Practice Area.
With the ante continuing to go up, take advantage of the early bird discount now for our pair of conferences – “The Say-on-Pay Workshop: 8th Annual Executive Compensation Conference” and the “6th Annual Proxy Disclosure Conference” (here’s the agendas) – which will be held on November 1st-2nd in San Francisco and via video webcast. Register now to obtain a 25% Early Bird Discount!