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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).
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