Views on improving the integrity of global capital markets
14 February 2012

Second Year of U.S. “Say on Pay”: Is It Working Better than Expected?

Matt Orsagh, CFA, CIPM

Building on the momentum of 2011 — the first year of mandatory “Say on Pay” in the United States —  investors in the U.S. continue to add to the tally of “no” votes on executive pay, with already a handful of failed Say-on-Pay votes  as the 2012 proxy season kicks off. However, there is a silver lining for investors and companies alike — we’re seeing signs that some companies have learned lessons from poor Say-on-Pay showings in 2011 and are now reaching out to shareowners to better align pay with performance.

Actuant Corporation

In January, Actuant Corporation earned the honor of receiving the first “no” Say-on-Pay vote of 2012, with only 47 percent approval for its executive pay plan. According to the report by proxy adviser ISS, the company also provided poor disclosure related to incentive plan goals, utilized above-median peer group benchmarking, and adopted a new supplemental retirement program for executives. The company also increased CEO pay while underperforming its peer group.

American Defense Systems

Just a day after Actuant received the bad news, micro-cap American Defense Systems became the 44nd company in the U.S. to fail to receive 50 percent support for executive compensation since Say on Pay became law at the beginning of 2011. Sure, American Defense Systems is an over-the-counter stock that hardly anyone has heard of, but it’s worth mentioning because the Say-on-Pay dissent was significant. Indeed, the company received only about 11 percent support based on votes cast “for” and “against,” which is the lowest approval level we have seen thus far. It appears that the dissent at American Defense Systems was fueled by other investor concerns besides executive pay — the company posted a negative share return of nearly 58 percent over the past fiscal year.

To this point, fewer than 10 S&P 500 companies have received a “no” vote on executive pay, with most failed votes coming at small and mid-cap companies. Although some may expect large companies to look at such numbers and shrug off investor dissent, it appears that a few of the larger companies with negative Say-on-Pay results in 2011 have increased their dialogue with shareowners and reached out to address perceived pay package weaknesses — just as advocates of Say on Pay said they would.

Beazer Homes USA

For example: Beazer Homes USA, which suffered through a failed advisory vote in 2011, won more than 95 percent approval for its pay scheme this time around after the company made changes to its compensation policies. The company scrapped time-vesting restricted stock and adopted a performance share plan that will require the achievement of absolute (compound annual stock price growth) and relative (total share return relative to publicly listed homebuilders) performance goals. Beazer also removed excise tax gross-ups, reduced the value of contractual pay multiples, and eliminated employment contracts that renewed automatically.

Jacobs Engineering

Jacobs Engineering also had a failed Say-on-Pay vote in 2011, but earned more than 96 percent approval for its executive pay plan in January. After listening to the concerns of investors, the company reduced strictly time-based stock awards, decreased the number of stock options in its long-term pay packages, established double-triggered change in control vesting provisions for new grants, and raised the CEO’s stock-holding requirements.


It may not always be possible, however, to tie an improved voting outcome on Say on Pay to any particular action by a corporation. Monsanto, which received only 65 percent support in a vote last year, garnered 85 percent support for its pay practices in 2012. In the wake of the disappointing Say-on-Pay results of 2011, Monsanto asked for feedback from its 50 largest shareowners who voted “no” in 2011. The company claims that no single pay practice offended the majority of investors last year. A read-through of the company’s 2012 proxy statement does not shed light on many material changes to Monsanto’s compensation plan. In fact, the compensation committee of the Monsanto board states that the 2011 pay incentives had largely been completed at the time of the negative vote in early in 2011. 

What happened then? The most recent Monsanto Compensation Discussion and Analysis (CD&A) report in the company proxy states that “… a number of these investors informed us the dialogue had enabled them to increase their understanding of our program.” It also likely didn’t hurt that the company enjoyed improved stock performance in 2011, along with a decline in CEO pay. A winning combination that often will mollify shareowners.

The true test of whether companies are listening to their shareowners on pay issues is how many other success stories we’ll see in the next few months from companies with failed or subpar 2011 Say-on-Pay votes. Stay tuned.

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

Matt Orsagh, CFA, CIPM, is a director of capital markets policy at CFA Institute, where he focuses on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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