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Say-on-Pay Update: Voting Results and Trends So Far


By: 
Date: June 6 2011

The first season of mandatory shareholder advisory votes on executive compensation (“say-on-pay”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act is in full-swing, and so far shareholders are generally supportive of the executive compensation practices at most companies. Cogent has reviewed the annual shareholder meeting voting results from 1,873 companies that are required to conduct a say-on-pay vote and that have filed the results of the votes through May 27, 2011. This alert highlights the voting outcomes for say-on-pay proposals and say-on-pay frequency proposals at these companies, and the impact of Institutional Shareholder Services (“ISS”) voting recommendations on shareholder votes. This alert also discusses the shareholder derivate lawsuits that have been filed following failed say-on-pay votes.

Say-on-Pay Voting Results
Of the 1,873 companies that have reported the voting results from their annual shareholder meetings, all but a small percentage have received favorable shareholder support for the say-on-pay proposals. More than two-thirds of companies have received 90% support or more. In contrast, twenty-nine companies, or 1.6%, have failed to receive at least 50% support for their executive compensation practices. The following table highlights the level of shareholder support for say-on-pay proposals so far.
Table 1 – Shareholder Support for Say-on-Pay Proposals
Note: The companies that have failed to obtain majority support are highlighted in Exhibit A, along with possible explanations for the failed vote.
Companies conducting a say-on-pay vote are not required to disclose whether or how they have considered the outcome of the vote until the subsequent proxy statement. For this reason, there has been little indication of how companies may respond to a failed vote. A handful of companies, including: Umpqua Holdings Corp, Stewart Information Systems, Curtiss-Wright Corp, Helix Energy Solutions Group, and Talbots Inc, have disclosed the intention to take this vote into consideration and take actions to address shareholders' concerns.
When voting on the frequency of say-on-pay, shareholders are generally in favor of an annual vote. The following table highlights the voting results on say-on-pay frequency so far.
Table 2 - Shareholder Preference on Say-on-Pay Frequency
Annual
Biennial
Triennial
1,465
(78.2%)
22
(1.2%)
386
(20.6%)
While investors tend to favor annual say-on-pay votes, companies may still recommend biennial or triennial votes. The following table highlights the tendency of shareholders to follow, or not follow, a company's recommendation on the frequency of say-on-pay votes.
Table 3 - Shareholder Support of Company Frequency Recommendation
Supported
Not Supported
1,340
(73.8%)
476
(26.2%)
ISS Impact on Voting Results
As expected, the ISS voting recommendations on say-on-pay proposals have had a significant impact on the voting outcomes. Cogent evaluated this impact at S&P 500 companies by reviewing the shareholder support for say-on-pay proposals at companies which ISS recommended voting "Against" versus "For". On average, when ISS recommended voting against the say-on-pay proposal, the result was a 27.9% lower level of shareholder support. Of the companies which received an ISS recommendation against say-on-pay, 16.7% failed to obtain majority support. Of the companies that received an ISS recommendation for say-on-pay, all obtained majority support, with an average of 92.0% support for the proposal. The following table highlights the impact of ISS on shareholder voting for companies in the S&P 500.
Table 4 - Impact of ISS Vote Recommendations
Recommendation
Companies
Avg. Support
For
Against
200
30
92.0%
64.1%
Given the impact of ISS on shareholder votes, more than fifty companies that have received a vote recommendation against the say-on-pay proposal have taken action to persuade shareholders otherwise. In most cases, these companies have filed a supplemental communication to shareholders which defends their pay practices and refutes the ISS recommendation. For example, a company may contend that the ISS policy is too broad and does not consider unique circumstances, or it may attempt to demonstrate a linkage of pay to performance, despite the results of the ISS pay-for-performance test. So far, fifty-one of these companies have reported the outcome of the shareholder vote, and of these, forty-five were ultimately successful in obtaining majority support for the say-on-pay proposal with an average support of 73.7%. Exhibit B highlights the companies that have filed additional materials in response to a recommendation from ISS to vote against the say-on-pay proposal, as well as the outcome of the shareholder vote, if available.

Shareholder Derivative Lawsuits
An interesting development in the first season of mandatory say-on-pay is the filing of shareholder derivate lawsuits against board members, compensation committee members, senior executives, and compensation consultants at companies that have failed to obtain majority support for say-on-pay. So far, these lawsuits have been limited to the first two companies to fail say-on-pay this season, Jacobs Engineering Group and Beazer Homes USA (shareholder lawsuits were filed in 2010 against KeyCorp and Occidental Petroleum). Shareholder allegations include increases in compensation despite company performance below shareholder expectations, and a breach of fiduciary duty concerning the violation of the stated objective to align pay and performance. These lawsuits are generally considered to be strike suits and without merit.

The First Year, So Far
The first year of mandatory say-on-pay has so far shown that shareholders are generally supportive of executive compensation practices at most companies. The influence of proxy advisory firms, especially ISS, has continued to increase, but some companies have been successful in defending their pay practices against negative vote recommendations. Look for more information from Cogent as the first year of say-on-pay continues.

About Cogent Compensation Partners
Cogent Compensation Partners is a leading provider of objective and expert advice on the subject of executive compensation, corporate governance, and the linkage between company performance and executive pay.
Our executive compensation consultants assist in aligning the various interests involved in the executive pay debate: employees, shareholders, institutions, and other stakeholders. Our services include compensation committee advisory, incentive plan design, compensation strategy development, board of director compensation analysis, executive compensation related shareholder proposal assistance and compensation risk assessments.



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