What About Those Say-On-Pay 'No' Votes?

The results are in. Given the opportunity to register their opinion for the first time, a majority of shareholders in at least 39 companies rejected executive compensation plans. Another 35 companies squeaked by with between 50 per cent and 60 per cent support, which according to David Eaton, director of global compensation analysis at Glass Lewis, is ‘pretty close to failing’.

These 74 companies are now left with the vexing question: what should they do about it? ‘If they sit there and do nothing, the level of opposition will start to grow,’ says Robin Ferracone, executive chair of compensation consulting firm Farient Advisors. ‘And if they just let this fester, they’ll be in the spotlight in a negative way on a consistent basis. That creates reputational damage, and could even have a depressive effect on the stock price.’

A handful of companies, including Beazer Homes, Jacobs Engineering, KeyCorp and Occidental Petroleum, are already feeling the heat – shareholders have filed lawsuits after directors went ahead and awarded the pay packages that investors had rejected. And if that’s not enough to prod directors into action before next year, leading proxy advisory firms are vowing to give them another incentive.

Institutional Shareholder Services (ISS) will apply a concept it calls ‘yellow card, red card’ to company directors, explains Patrick McGurn, executive director at the proxy advisory behemoth. This is based on the practice in international football competitions whereby referees issue rule-breaking players with a yellow card as a warning to let them know that any further transgressions will be penalised with a red card and expulsion from the game.

‘Year one is yellow – the advisory vote [say on pay],’ McGurn says. ‘Year two is red. If there are unresolved contentious issues remaining from year one, there’ll be a ‘no’ vote on directors.’ He continues: ‘Where is the ‘red zone’? That’s the big off-season question for our investor clients. In our client survey, we’ll ask point-blank about where our clients want us to draw the line. 50 per cent is obvious, but what about 45? 40? Lower? I’m guessing our clients won’t want to draw the line at 20 per cent. We’ll set out guidelines in November.’

Eaton says his company is also likely to ‘hold the compensation committee members, or at least the chairman, accountable for not addressing these issues. If we think it necessary we will recommend against votes on compensation committee members.’

Define it, and do something about it >>

[Article by Adam Piore, Corporate Secretary]

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