Jacobs Engineering Struck Down By Say-On-Pay

It didn’t take long for shareholders to show their dissatisfaction on executive pay practices through the newly required say-on-pay advisory vote under Dodd-Frank.

Jacobs Engineering’s January 27 annual meeting saw the management’s compensation proposal draw a 53.7 per cent negative vote. Support for the proposal drew 44.8 per cent while abstentions accounted for 1.5 per cent of the vote.

The California-based company, which is in the S&P 500 index, is the fourth US issuer (and first in 2011 under the new requirements) to fail to earn majority support for its pay practices.

Under the Dodd-Frank Act, all large and mid-cap firms now have to hold advisory votes. Companies under $75 mn capitalisation have until 2013 to implement the requirement.

Pointing out that only 120 companies held say-on-pay advisory votes in 2010, Ted Allen, director of publications at RiskMetrics, predicts the list of negative votes will ‘grow significantly this year.’

In a note to clients, Allen says Dodd-Frank’s ban on discretionary broker votes for compensation agenda items ‘may have been decisive, as there were 16.2 mn broker votes at the company’s meeting.’

Another Dodd-Frank requirement compels management to ask shareholders their preference for the frequency of a say-on-pay vote – every one, two or three years. Shareholders roundly rejected Jacobs Engineering’s management recommendation that an advisory vote be held every three years, with 67 per cent opting instead for an annual poll.

The opposition to Jacobs Engineering’s pay practices was ‘fuelled by pay-for-performance concerns,’ writes Allen. The post points out that total CEO compensation rose by 33.7 per cent, although the company’s most recent one and three-year total 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 such grants in 2009 and 2008,’ Allen notes.

In an interview, he says external lawyers and compensation consultants are advising management to recommend and adopt an annual say-on-pay vote, suggesting that if they don’t, shareholders unhappy with the compensation plan ‘won’t have any recourse except to vote against compensation committee members’ in off years.

‘For board members, a vote against the compensation committee feels more like a personal rebuke’ than a negative vote on the compensation report, Allen says. Companies somewhat on the fence ‘are going to lean more toward annual votes.’

‘It’s going to be an interesting few years,’ says Tim Hearn, a corporate partner at law firm Dorsey & Whitney. Managements will look for compensation structures that can satisfy their business needs and still win shareholder support, he explains: ‘The executive compensation industry is probably going to come up with a model more palatable to shareholders.’

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