The success of say-on-pay is an endorsement of the executive pay model at a preponderance of American companies—even the global ones, said Ira T. Kay, managing partner at Pay Governance LLC in New York.
With 98 percent of companies
passing their annual say-on-pay votes during the past four years, it's clear
that proxy advisers have had an impact on reducing “shareholder irritants,” Kay
said. He cited tax gross-up, excessive severance payments and other problematic
pay practices that companies have abandoned in response to criticism from proxy
advisers, primarily Institutional Shareholder Services Inc.
The question, Kay said, is whether say-on-pay votes create additional shareholder value.
Institutional shareholders should expect that proxy adviser voting recommendations will improve the company's subsequent total shareholder return (TSR) as companies make changes to their pay programs to conform to proxy adviser policies, Kay said.
However, his research indicates that this isn't the case. A proxy adviser “against” recommendation on say-on-pay is associated with lower subsequent two-year company TSR, Kay said.
Kay spoke during a March 31 panel discussion on executive compensation at the Council of Institutional Investors Spring 2015 Conference.
Of the possible explanations for the gap in subsequent TSR performance, two principal theories derived from Kay's research are:
• the proxy adviser “against” recommendation that triggers substantial changes in incentive pay programs makes the programs worse and therefore the stock price goes down, or
• the “against” recommendation serves as a bearish signal from ISS that it is a bad plan or has bad pay-for-performance alignment and that is a good enough reason for investors to stay away.
Yes Means No
With respect to the near-universal support for company pay programs, panelist Stephen O'Byrne, president of Shareholder Value Advisors Inc., Larchmont, N.Y., said that “investors frequently vote ‘yes' despite misgivings.”
“High approval rates reflect the perception that negative votes are costly and ineffective,” O'Byrne said, citing a 2015 investor survey that found “only 21 percent of respondents agreed that CEO compensation is appropriate in both size and structure.”
In a show of hands, about one-third of the panel discussion audience agreed with an attendee's comment that there are too many “for” recommendations from proxy advisers that, after finding significant deficiencies, nevertheless recommend voting for the pay program.
If, instead of a 2 percent failure rate, 20 percent of companies had failed say-on-pay, Kay said there would been “chaos in the boardroom.” The compensation programs of “hundreds, maybe thousands of companies would have changed” as companies scrambled to make changes even if they believed their plans were working, he said. These changes “would have been for the worse” and a lot of damage would have been done, he said.
Excerpted from a story that ran in Pension & Benefits Daily (04/01/2015).
Gain access to the most reliable source for comprehensive pension and benefits and executive compensation research with a free trial to the Benefits Practice Resource Center.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)