Given the opportunity to give their opinions about corporate compensation, shareholders have expressed some disenchantment with the current practices.
So far this proxy season, a majority of shareholders at 16 companies have voted against the executive compensation plans. The number is small, considering voting has taken place at 383 companies, but is relatively large when compared with such negative votes at companies in other countries.
In general, shareholders in other countries — such as the United Kingdom, the Netherlands or Australia — might vote in the majority against executive compensation at one or two companies a year, according to Paul Hodgson, senior research associate, GovernanceMetrics International LLC. Shareholders in those countries have had such votes for a number of years. In the U.S., “say-on-pay” votes became a requirement only in January for all companies, although a relatively few voluntarily offered such votes for the last year or so.
It is too early to tell the meaning of the U.S. “say-on-pay voting” as the proxy season is still well under way. At the companies where a majority of shareholders rejected the executive compensation, the situations are all different, making it difficult to draw any general conclusion about the reasons.
Clearly, the boards of directors at those companies where the compensation packages were rejected have to examine the votes to see who voted against, and then engage with the shareholders to understand why, and what changes should be made.
Even though most corporations won majority shareholder approval of their executive compensation schemes, they should not be complacent that they have dodged shareholder concern and that their pay-for-performance models are working.
The votes require further analysis of the level of shareholder support for the executive pay. It has averaged 89.5% in support and 8.6% against with 1.9% abstentions, according to ISS Governance, a corporate governance research firm. The level of support is one measure companies should use to determine how well they have aligned executive pay with the interests of shareholders.
With “say on pay” so new, companies appear to be unprepared to measure its impact, and unsure how to interpret the meaning of the voting in developing or modifying executive compensation arrangements.
Only 51% of the companies have defined how they will evaluate success, according to a Towers Watson survey. Of those companies, 19.6% believe that a favorable shareholder vote of at least 90% would be considered successful, while 37.2% believe a vote of at least 80% would be considered successful; 27.5% believe at least 70%; 13.7% believe at least 60%; and 2% believe at least 50%.
Only 8% of companies surveyed have a process in place for developing plans to respond to potential shareholder concerns on executive compensation, the Towers Watson survey found.
The voting process should encourage companies to engage in dialogue with shareholders to understand the implications of the voting.
The shareholder support at most companies for executive compensation has not come because executive compensation has declined at them. In fact, total executive compensation of CEOs at the largest U.S. corporations rose a median 9% in 2010, according to another Towers Watson study.
The voting indicates shareholders don't necessarily oppose rising executive compensation, so long as it appears to align with shareholder interests. With the stock market up double digits in the past year, companies that won support from shareholders might believe they have achieved the goal of aligning pay for performance, although a high level of disenchantment might make such a conclusion difficult to draw. For example, at Goldman Sachs Group Inc.'s annual meeting, a majority of shareholders approved the executive compensation structure, yet 27% of shareholders voted against it.
Judging by the voting so far, shareholders appear to be paying close attention to executive pay arrangements, even though the voting is only advisory. The best outcome would be for companies to redesign executive incentive compensation systems to align the long-term interests of the corporation, and hence the shareholders, with fair compensation for key executives.
Ideally, such systems should encourage some risk taking, because that is the only way a company can prosper and thrive, but with checks and balances so that excessive risk does not threaten the existence of the company.