ISS warns of follow-up activism over executive pay

US companies that received more than 30 per cent opposition to their pay proposals are likely to face heightened scrutiny during the 2012 proxy season, warns Institutional Shareholder Services (ISS) in its post-season report.

Shareholders have indicated that they expect to see ‘explicit action’ from management once this threshold is crossed, writes the proxy adviser.

ISS data show 164 companies – or roughly 6 per cent – out of the Russell 3000 Index experienced more than 30 per cent opposition to their pay proposals and therefore are at higher risk.

‘If… companies don’t adequately respond to this year’s say-on-pay votes, investors may ramp up their protests, withhold support from more compensation committee members in 2012 and vote ‘no’ during the advisory vote,’ states ISS.

Changing their ways

The proxy adviser highlights two examples of companies that have made significant revisions to executive compensation and seen shareholder support rebound.

Occidental Petroleum and KeyCorp both failed pay votes in 2010, but this year won 91.3 per cent and 86.7 per cent support, respectively, after making ‘substantive changes,’ explains ISS.

‘Occidental… cut the CEO’s long-term incentive opportunities by 70 per cent, expanded the peer group used to benchmark pay, and reduced award opportunities for other named executives,’ notes the report.

Broad support for management

The warning comes in ISS’ final roundup of the 2011 US proxy season, which for the first time saw all US companies face an advisory vote on pay.

Overall, shareholders displayed strong support for management’s pay proposals. The report finds that, on average, investors offer 92.1 per cent support in these votes.

As of September 1, just 38 companies in the Russell 3000 Index had been defeated in say-on-pay votes.

Download the full 2011 US Post-Season Report.

[Article by Tim Human, Inside Investor Relations]

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