Views on improving the integrity of global capital markets
14 February 2011

Early Returns from “Say on Pay”

The philosophy behind the creation of the CFA Institute CD&A Template (PDF) was simple: a succinct, plain-English summary of a company’s executive compensation practices to give shareowners all the information they need to make an informed decision on executive compensation issues and to guide “say-on-pay” proxy votes. No company needs a 40-plus-page description of executive compensation decisions, and if they feel they do, they are likely hiding something — or just hoping that investors get too tired of reading to connect the dots between executive pay and company performance.

So far, the early analysis of say-on-pay votes at public companies in the United States has shown that sometimes there is not enough disclosure, sometimes there is too much, and that clear disclosures make it harder to hide what is ultimately a poor link between pay and performance. To date, two companies have failed to receive majority support for their executive pay policies. That works out to about a 7 percent failure rate, according to the Buckle up for the proxy season — this is going to get interesting.

Here’s some analysis of where a sampling of companies have gone wrong — and where they’ve gone right — in preparing the CD&A sections of their proxy statements.

Jacobs Engineering

Jacobs Engineering was the first company this year to receive less than 50 percent shareholder support in a say-on-pay vote. While total CEO compensation at Jacobs Engineering rose by over 33 percent in the past year, the company’s most recent one- and three-year shareholder returns were below the median for its peer group. The primary reason for the CEO’s compensation increase was the grant of 125,000 time-vesting restricted stock awards in May 2010, after no grants in 2009 and 2008. However, the one-time grants given to executives were not explained in great detail in the CD&A section of the company’s original proxy statement. The CD&A was very short — only about 7-8 pages in length. While we like brevity, we like transparency more. The fact the company failed to provide information about the executive grants in the original proxy likely cost the company majority support for its compensation plan.


Monsanto received only about two-thirds support for its say-on-pay vote. While technically passing, the results are likely of concern for the company. The first thing that jumped out at us was that the compensation portion of Monsanto’s proxy (CD&A + Compensation Tables + Footnotes) was about 47 pages long. And while it had a lot of what might be called best practices in compensation disclosure (executive summary, disclosure of performance metrics) the CD&A was still difficult to comprehend and just daunting to try to get through.

Also noteworthy was the fact that EPS, a metric that can be manipulated in the short term, made up half of the yearly bonus goal. The CEO also received most of his compensation in stock and option — options that were granted at market rates with no performance hurdles attached. We are sure Monsanto will be talking to shareowners about this vote. And if they aren’t, they should get on the phone to their biggest shareowners and ask them to better understand why this happened. At first glance, however, we would guess it has something to do with the fact that the stock price decreased from 1 January to 31 December 2010, and the CEO total compensation increased by about 12.3 percent. The total CEO compensation of over $13 million in 2010, up from approximately $11.7 million in 2009, was largely thanks to a sizable stock grant.

Beazer Homes

Last week, Beazer Homes was the second company this year to fail to reach the 50 percent support level in a say-on-pay vote.

Beazer’s CD&A is relatively straightforward, not too long, not driven by boilerplate legalese. It delivers a relatively clear message about how the company links pay to performance. In summary, the disclosure is pretty good.

So the problem here isn’t the CD&A disclosure so much as the fact the clear disclosure makes it more obvious to investors that the company hasn’t done an adequate job in linking pay to performance.

Despite a recent run-up with the rest of the market, Beazer Homes posted a negative return for shareowners in 2010, and a negative 20 percent return over three years — causing it to trail the company’s industry peers in both key metrics.

We commend the company for a relatively clear CD&A that does a good job of explaining the compensation committee’s philosophy about pay and performance. The only problem here is that a majority of Beazer Homes’ shareowners don’t agree with that philosophy. They feel that the CEO and other named executive officers have been paid too much for poor performance.

By the way, Beazer Homes investors also voted for an annual say-on-pay vote. So the compensation committee has a year to set things right in the eyes of investors.

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

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