Yesterday the Council of Institutional Investors released a white paper, prepared by Farient Advisors LLC, analyzing 37 “failed” say-on-pay votes from annual meetings taking place between January 1 and July 1, 2011, and citing another 37 votes that “passed” but by a margin of 10% or less.
The paper looks to identify “compensation practices where support for change is the greatest”, and to help investors “target initiatives for improved pay practices and provide useful input for structuring their voting policies”. At the same time, it also provides practical insights and recommendations for all companies, but particularly for those that did not achieve strong investor support or with failed say-on-pay votes.
Farient interviewed, 19 CII member organizations, including public employee pension funds, mutual funds and union pension funds, as well as the two largest proxy advisory firms — Institutional Shareholder Services, Inc. and Glass Lewis & Co. — and the proxy solicitation firm Morrow & Co., LLC, to ascertain, among other things, the:
- processes by which investors evaluated executive compensation programs and the extent to which they relied on analyses and recommendations from proxy advisory firms; and
- factors that motivated investors to vote against executive compensations programs at companies with failed say-on-pay votes.
As to the investors’ evaluation processes, the paper concludes that:
- investors were extremely thoughtful in how they assessed executive compensation programs, considering multiple factors and sources, performance over a number of years, and focusing on total shareholder returns;
- investors that relied more heavily on proxy advisory firms did so in part because of resource constraints;
- resource and staffing constraints were also cited as causing many investors to focus on outlier companies; and
- many investors plan to revisit and potentially revise their voting guidelines in the future.
The paper also found that the factors that most frequently contributed to investors voting against executive compensations programs included:
- the presence of a disconnect between pay and performance;
- poor pay practices;
- poor disclosure practices; and
- inappropriately high levels of compensation for the company’s size, industry and performance.
The above are only a few of the paper’s key conclusions; the full paper is posted below, it’s a quick and easy read and definitely worth the time.