Global Issues Impacting Remuneration – Say on Pay

Our regular summary of global issues impacting remuneration here in Australia

Introduction

The Say-on–Pay legislation in the US has triggered some interesting annual general meetings there with a number of companies struggling to please shareholders with their remuneration decisions. In contrast to what many commentators thought would happen, the majority of companies are however gaining overwhelming support for their remuneration plans.

The response to the Say-on-Pay legislation in the US was viewed by many as a guide to what might happen in Australia as our government attempts to further control remuneration decisions made by large corporates. The US story is looking promising though, as by mid May, only five S&P 500 firms and 17 Russell 3000 companies had reported failed pay votes this year. This amounts to just 2 percent of the 1,069 U.S. issuers that have held advisory votes this year and where ISS has collected vote results. Notwithstanding these votes, most companies are receiving overwhelming support for their pay practices. So far, companies are averaging 91 percent support (based on votes “for” and “against”), up from 89 percent last year. The median support level is 96 percent this year, according to ISS data.

It would appear that most of the failed pay votes have been driven by pay for performance concerns, for example cases where corporate performance has been either negative or poor yet there was still a plan to increase levels of remuneration for the CEO. An example of a company which lost the vote to increase CEO pay was the Michigan-based Masco, where the CEO’s total remuneration increased by 15.3 percent, while the company posted negative shareholder returns over the past one, three, and five years. The increase in CEO remuneration was driven by the value of stock options granted to the CEO. For the past three fiscal years (2010, 2009 and 2008), it appears that the CEO received an annual grant of 816,000 shares of stock options regardless of the company’s performance. Additionally, the company has used the same performance metrics and hurdles for both cash and stock incentives, which could result in duplicate payments to executives should the performance targets be achieved.

At Pennsylvania-based Nutrisystem, total CEO compensation swelled by 54.1 percent, despite the fact that the company’s one- and three-year share returns were below the median of its industry peer group. Most of this pay increase resulted from a $693,000 annual bonus received in 2010, in tandem with the 48.7 percent increase in the value of the restricted stock awarded to the CEO. Of the 208,000 shares of restricted stock granted to the CEO in 2010, 175,000 were time-based and only 33,000 performance-based. In 2010, the chief executive achieved performance goals to warrant an annual bonus equal to 75 percent of his base salary, but his employment contract provided that he receive a guaranteed minimum bonus of 100 percent of salary (or $693,000). The CEO’s total pay is substantially above the median paid by peer companies.

It is interesting to see how the new legislation has also highlighted the previous impact of broker votes. Under the Dodd-Frank Act, brokers are barred from voting on remuneration matters. According to a company filing, there were 7.3 million potential broker votes, which exceeded the 6.8 million “for” votes. Had most of those broker votes been cast for management, as brokers could have done before the Dodd-Frank Act barred such votes on remuneration matters, the company would have received majority support.

As the new NSW government is urging retirees to invest in infrastructure projects, it will need to be mindful that these baby boomers might well develop a keen interest in executive pay practices of organisations funded by their monies. In another response to the legislation, the American Federation of State, County, and Municipal Employees (AFSCME) and RAM Trust urged investors to vote against the pay practices of ExxonMobil at the oil giant’s May 25 meeting. “Is there any limit to what the executives of publicly traded companies can pay themselves? Exxon’s ‘just trust us’ approach to executive compensation should not be rubber stamped by institutional investors,” AFSCME President Gerald W. McEntee said in a press release “Exxon’s compensation committee needs to explain how these lavish amounts are tied to performance.” The activist investors argue that the compensation for Chairman and CEO Rex Tillerson is out of line with the company’s share performance. According to ISS data, the chief executive received a 6.6 percent increase in total pay in 2010, while the company posted a negative 5.8 percent share return over the past three years and a 10.1 percent share return in the past year, which both trail industry peers.
The investors further contend that the annual bonuses for Exxon executives are not based on the achievement of pre-established
performance metrics, but rather are awarded on a discretionary basis after the compensation committee sets an annual bonus pool. In 2010, Tillerson received a $3.36 million bonus, 40 percent more than in 2009.
The investors also complain that the company’s restricted stock awards, which make up 50 to 70 percent of senior executive
compensation, vest over time, “which rewards executives for the passage of time, rather than the achievement of performance goals.”
The unions also assert that Exxon does not conduct a meaningful benchmarking of pay.
When benchmarking pay to peers, the compensation committee does not target any specific percentile, but rather uses its “wellinformed
judgment,” according to the union.

“Shareholders have no way to determine whether pay is benchmarked below, at, or above the peer median,” the investors said. In a May 6 filing, ExxonMobil defended its pay practices and said CEO pay has been aligned with shareholder returns during three out of the past four fiscal years; the exception was 2008, when “the Compensation Committee was taking steps to improve alignment of CEO pay with market peers.” The company argued that its executive pay should not be judged solely against short-term share returns. “ExxonMobil’s business depends on investment lead times ranging from a minimum of five to 10 years, to decades. Our compensation program is tied to the long-term nature of our business, as it should be,” the company said. AFSCME and RAM Trust also are urging investors to support an annual advisory vote on compensation at ExxonMobil. Management has endorsed a triennial vote.

Results from the meeting held on May 25, were as follows:
▪ Advisory Vote on Executive Compensation 67.2% in favour, 32.8% voted against it.
▪ Frequency of Advisory Vote on Compensation 42.7% voted for every 3 years, 2.8% for every 2 years and the majority, 54.5% voted for an annual vote.

It would seem that the unions influenced the vote but were not able to rally enough support to vote down this year’s remuneration plan.
Shareholders will however now have the opportunities to review and vote on executive remuneration every year.

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