Shareholder Scrutiny Shaping Executive Remuneration Packages
A recent survey by Meridian Compensation Partners shows that US companies are responding to increased shareholder scrutiny on executive remuneration, with many companies implementing more shareholder friendly practices and a stronger alignment between pay and performance.
The mix of long term incentives has shifted dramatically from stock options to performance shares in the US, whereby a payout only occurs after the achievement of certain performance criteria, most often shareholder return or critical financial performance/key milestones.
Interestingly in terms of accountability for directors, only 36% of companies have separated the role of Chairman of the Board and Managing Director. As pressure increases to separate these roles, nine out of ten boards now have a ‘lead director” role in place, often with significant responsibilities.
And The Votes Are In – In the US and Australia
In the US, shareholders have had the capacity under the Dodd-Frank legislation to vote on executive remuneration over the last year. The legislation known as “say-on-pay” gives shareholders a chance to let boards know what they feel about executive reward practices and payment levels.
There were 2,532 companies which disclosed remuneration arrangements during the 2011 reporting season and shareholders in only 39 of them rejected executive pay plans. According to analysts, the tally of less than 2% of companies was roughly in line with expectations.
The tally in Australia is expected to be considerably higher and Egan Associates will keep you informed as the current reporting season concludes in respect of the 2011 financial year. One very interesting fact coming from our ongoing research into this issue is that in Australia when we talk of shareholders, it is not principally the “mums and dads” that are using their voting power under the “two strikes” legislation, rather this power rests heavily with four key nominee companies. Recent analysis by Egan Associates shows that in the Top 100 Companies, four leading nominee companies hold over 40% of shares. The ‘two strikes” legislation has given these nominee companies considerable opportunity to flex their muscle not only over remuneration but effectively over board composition.
We have seen one example in the Australian reporting season of 2011 where a company with poor results appropriately revealed no salary increases for executives, no bonuses and no long term incentive grants but still obtained a negative vote to its remuneration report. Given the evidence from Pearl Meyer & Partners (PMP) that a failed vote can result in negative media attention, pressure on board members and shareholder lawsuits, (in the US, of the 40 or so companies failing in 2011, seven already face shareholder lawsuits against executives, directors and in some cases their consultants), this concentration of power in the hands of very few shareholders is a concerning consequence of the government’s new legislation.
It appears from research that the common reason for a negative vote was a pay-for –performance disconnect. PMP suggest three fairly obvious but often neglected ways to increase shareholder support levels:
- Enhance proxy disclosure, write it clearly and present it in an easy to read format
- Understand shareholder concerns – how companies respond to shareholder concerns will be an important factor in future votes, so it is critical to understand the voting policies of major shareholders
- Improve shareholder communications – a positive aspect of the say-on-pay rules is that it has increased communication between shareholders and companies. Two-way communication throughout the year is recommended by PMP.
Compensation for US Corporate Directors Increased Moderately in 2010
Remuneration for outside directors in the largest US corporations increased moderately last year. Analysis by Towers Watson also showed that more companies replaced board and committee meeting fees with fixed retainers for service.
The analysis of director remuneration at Fortune 500 companies found that total remuneration for directors climbed 6% in 2010 over 2009 levels. That is significantly larger than the 1% median increase directors received in 2009 (GFC affected), but still below the nearly 10% annual increases directors had been receiving prior to the economic crisis.
Golden Parachutes Stay Afloat in Initial 2011 Proxy Votes
A recent study by Pearl Meyer & Partners (PMP) revealed that shareholders have also been supportive of executive pay arrangements as they related to corporate mergers. The study looked at the results of newly required shareholder advisory votes called Say on Golden Parachutes (SOGP), which relate to management payouts that would be triggered by a corporate change-in-control.
Shareholders appear to have given support for golden parachutes where the transactions which would trigger such payments made fundamental financial sense for the company.
Under new SEC rules, as of April 2011 companies are required to give shareholders an advisory vote on any remuneration that would be paid to executives in relation to a proposed corporate transaction being brought to a vote. Such “golden parachutes” may include stock options, bonuses, severance pay or other payments triggered by the change-in-control.
There were 37 SOGP votes tracked by PMP since the rule’s inception and 91% of them obtained positive shareholder votes on the related executive pay arrangements.
This compares to the nearly 98% of approvals on executive pay generally. It will be interesting to see if the apparent greater shareholder scrutiny on executive remuneration payouts for change in control situations continues over time.