Views on improving the integrity of global capital markets
07 May 2012

Investor Ire over Executive Pay Rises

Matt Orsagh, CFA, CIPM

It was only a matter of time. As we get deeper into proxy season (a preponderance of companies hold their proxy votes in the spring — yes it’s different in Australia, but we’ll get to that so be patient), it was inevitable that the number of contentious annual “say-on-pay” votes would rise. In the slow, sometimes halting recovery from the financial crisis — that now includes a double-dip recession in the U.K. — investors are showing little patience for executive pay packages that don’t appear to link pay for performance.

The say-on-pay vote has proven an elegant compromise addressing the issue of investor frustration over executive pay plans that don’t appear to hold executives accountable for long-term performance. Increasingly, investors are using a “no” vote as a cudgel to beat compensation committees back into line when investors perceive disconnects between pay and performance that are inadequately addressed by the company.

Thus far in the United States, eight companies have failed their say-on pay-votes: Actuant, International Gam Technology, KB Home, Citigroup, FirstMerit Corp., NRG Energy, Ryland Group, and Cooper Industries. Check out the excellent report by Semler Brossy (up to date through 2 May) for a recap of the say-on-pay season. NYSE Euronext barely escaped a “no” vote on pay when investors complained about a disconnect between pay and performance, and Swiss bank UBS, received a passing say-on-pay grade, but with underwhelming support of just 60 percent at its annual meeting on 3 May.

We find a few interesting, if not all that surprising, trends playing out in the United States:

  • Companies with failed say-on-pay votes in 2011 have passed in 2012.
  • Companies with less than 70 percent support in 2011 have received increased support in the current proxy season.
  • When proxy adviser ISS advises “against” on say-on-pay votes, support is about 27 percent lower than at companies where ISS suggested a “yes” vote on pay.

It is still early days in the 2012 U.S. proxy season, but it appears that say on pay is working as intended. Boards and compensation committees that had an unpleasant experience with the vote in 2011 appear to be addressing investor concerns; so far we have not seen any repeat offenders from last year.

Proxy adviser recommendations do hold some sway of course, but what we hear from investors is that proactive companies are having conversations about pay — and other important issues — long before proxy season (often starting in the summer of the previous year) to address investor concerns before they can turn into a PR headache at the company’s annual meeting.

It is also still early in the whole say-on-pay era, meaning that one year of trends should not be seen as a predictor of the future. So while the second year of say on pay in the U.S. has seen increased dialogue between issuers and investors, we wouldn’t be at all surprised to  actually see a higher negative vote tally at the end of the current proxy season than the 38 “no” votes in 2011.

Also, it only stands to reason that there will be more negative say-on-pay votes in bad times than in good. The U.K., for one, just entered recessionary territory again, and people are less forgiving of pay-for-performance disconnects when their own pockets feel less full. So we wouldn’t be surprised to see more votes like the recent say-on-pay vote at Barclays, or the scenario experienced by the British insurer Aviva, in which investor displeasure over a perceived pay-and-performance disconnect led the company CEO to refuse a pay increase.

What will be most interesting to watch is how say on pay plays out over time. There are thousands of public companies in the U.S., and thousands more in the world that fall under some kind of say-on-pay regime. We would expect the trend of increased dialogue between issuers and investors to continue. It appears a number of companies are using the CFA Institute Compensation Discussion and Analysis Template in order to help simplify their compensation disclosures and facilitate more productive dialogue with shareowners. The template was meant to help companies (especially smaller companies with fewer resources) to produce a more clear and concise CD&A to serve as a communications document to facilitate dialogue, and not merely a compliance document.

With increased dialogue, we would expect negative say-on-pay votes to subside in the years to come (give or take a recession and negative market or two) as investors and issuers find common ground on executive compensation.

And if they don’t, maybe the U.S. and UK will adopt something akin to the dreaded (dreaded by directors, that is) Australian “two- strikes” model. Based on legislation in effect since July 2011, if an Australian company’s remuneration vote garners more than 25 percent votes against it for two consecutive years, a vote is held to “spill” the board of directors. I think it is pretty self-explanatory what this “spill” means. If over 50 percent of shareowners then vote to spill the board, a new extraordinary general meeting must be held within 90 days for director re-election.

In the most recent proxy season, 14 companies on the Australian Securities Exchange earned their first strike. If any of these companies earn their second strike later this year (remember southern hemisphere seasons are the opposite of those north of the equator, meaning Australia’s “spring” proxy season will come later this year), expect activist investors in jurisdictions with say on pay to take note.

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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