For future reference, I’m bookmarking 2012 Say-on-Pay Votes: Fulfilled Expectations, Though Not Without Surprises by Shirley Westcott of Alliance Advisors, LLC, originally published in the corporate governance newsletter VIPsight.
My primary purpose in linking to this report is so that I can come back to it when developing a list of targets for possible proxy access proposals. Any company that failed its say-on-pay vote (highlighted in red) has already passed a meaningful screen that could be used in sifting through potential candidates. As Westcott mentions,
in many cases the institutional investor community will apply heightened scrutiny to compensation plans that received “significant” opposition. Thus, the data set were viewed in this report—shown in Appendix A—covers plans that received less than 70% support.
I think we can safely say these companies will also get heightened scrutiny from retail investors as well, and we generally file about 40% of the shareowner proposals.
Through June 25, 2012 annual meeting dates, 53 SOP proposals had been rejected by shareholders (2.4% of the total), up from 37 (1.4% of the total) for the same period last year. Among these were 12 S&P 500 companies, double the number of S&P 500 firms that failed SOP in 2011.
The influence of ISS continued this year and that of Glass Lewis increased.
A March 2012 study by academics at Columbia University, Duke University and the University of St. Gallen, concluded that proxy advisor recommendations were the key determinants of SOP voting outcomes in 2011.
According to their findings:
- A negative ISS recommendation was associated with 24.7% more votes against SOP.
- A negative Glass Lewis recommendation was associated with 12.9% more votes against SOP.
- Negative recommendations by both proxy advisors led to 37.9% higher voting dissent.
As I have mentioned in previous posts (see Shareholder Activism: Stanford Rock – Part 2 of 3 near the bottom), Glass Lewis has partnered with Equilar to integrate their analysis into its PFP model for annual meetings beginning in July 2012. I think it could be a game changer.
However, even with such improvements, the whole CEO compensation system will remain unjustified. As pointed out in Compensation and the Myth of the Corporate Superstar by Charles M. Elson and Craig K. Ferrere,
although the notion that talent is a competitive market is both attractive and plausible, it is highly questionable. Executive talent is not fully transferable between companies. Scholars have long recognized a distinction between firm-specific and general skills. It is quite apparent that successful CEOs leverage not only their intrinsic talents but also, and more importantly, a vast accumulation of firm-specific knowledge developed over a multi-year career. Whether it is deep knowledge of an organization’s personnel or the processes specific to a particular operation, this skill set is learned carefully over a long tenure with a company and not easily capable of quick replication at other firms. In fact, when “superstar” executives change companies, the result is usually disappointing…
Bottom line, a compensation setting process that is reliant on peer comparisons is misguided. So while shareholder activists and recent regulations have sought sharper peer group comparisons as a means of rationalizing pay, we believe what is needed is not better peer groups, but rather less reliance on peer group analyses, and more emphasis on encouraging directors to use their discretion in paying only that which is merited.