As we predicted, based on the more limited experience with "said-to-pay" voting prior to Dodd-Frank," shareholders in the first year under Dodd-Frank gen-. Finally, we conclude with some observations about how Dodd-Frank says- paid tenure has and may continue to shape the US.
SAY-ON-PAY IN THE UNITED STATES
The Say-on-Pay Debate
Arguments for Say-on-Pay
We document a positive market reaction to the announcement of pay adjustment speech for firms with questionable CEO pay practices and, more specifically, weak penalties for poor performance, consistent with shareholders' perception of pay speech. as a value-enhancing monitoring mechanism. 18 See Regan Adamson & Daniel Lumm, Shareholder Democracy and the Wage Movement Saying: Progress, But How Do You Define Success.
Arguments Against Say-on-Pay
SEC rules also required companies to publicly disclose the results of the say-on-pay vote on Form 8-K within four business days of the outcome. 34;Smaller reporting companies" will be subject to the say-on-pay voting requirement for annual meetings after January 20, 2013.
SHAREHOLDER SAY-ON-PAY VOTING IN 2011
The agency neither expressed a view on the usefulness of "say-in-pay" nor whether "say-in-pay" would affect practices or wage levels. 64. We focused on the relationship between shareholder voting and total stock returns, total CEO pay, and CEO pay growth because they were identified as important factors by the ISS in describing what appeared to influence voting of shareholders to say-for-pay. 75. The other major proxy advisory firm, Glass Lewis, made negative voting recommendations at a rate that appeared to be similar to that of ISS.
75 The 2011 ISS proxy voting guidelines identified several key factors that it considered in its recommendations on management proposals for say-on-pay.
Effect of ISS Recommendations on Say-on-Pay
However, a negative ISS recommendation does not necessarily mean that the company will receive less than majority support for its say-on-pay proposal. Overall, shareholders in 1,347 companies in our sample supported (by a majority or majority vote) an annual vote on pay, compared to shareholders in only 123 companies supporting a vote every three years. In other words, say-on-pay promises to be an annual event at most major public companies.
At 377 companies in our sample where management recommended biennial or triennial voting, shareholders voted in accordance with the ISS recommendation for annual voting in 254 of the companies.
Effect of Other Factors on Say-on-Pay Voting
Effect of "Total Stock Return"
Given the importance shareholders seem to place on company performance in their say-on-pay vote, we looked at how the company's total stock return ("TSR") (defined as the cumulative raw return of the company's stock in the twenty-four months before the end of fiscal year 2010) and ISS recommendations correlated with shareholder votes. As table 3 shows, TSR is a strong predictor of say-on-pay voting strong TSRs correlate with high levels of shareholder support and weak TSRs correlate with low levels of shareholder support.8 7 We group companies in our study by quintile based on their TSR on two years, with the worst performers in Group 1 and the strongest in Group 5. We see that a negative ISS recommendation has the greatest impact for Group 1 (the worst TSR quintile), where say-on-pay proposals have received only 62.8% average vote support, compared to Group 5 (the strongest TSR quintile), where the proposals had an average of 68.9% vote support.
Eg. A 2011 Equilar "say-on-pay" survey found that "among those companies that received more than 90 percent approval, over 20 percent still had a TSR ranking in the bottom quartile."9 Nevertheless, performance results were important, as shown. at the Equilar survey figure below showing a "distribution of companies by performance that fall into each voting framework for one-year total shareholder return":90.
Effect of CEO Pay Growth
Based on these univariate results, CEO pay growth does not appear to have as decisive an effect on shareholder pay voting as some have claimed. Although the increase in CEO salaries had a negative effect on the votes to be paid, this did not happen until after the ISS had given a "yes" vote recommendation. Specifically, given a positive ISS voting recommendation, shareholders gave 7.3% less voting support at firms with the highest wage growth compared to firms with the lowest wage growth.
But when the ISS made a "no" vote recommendation, there was no statistically significant difference in voting results, although the average vote was about 3.6% lower in companies with high CEO pay growth compared to no. - companies with a low growth rate of CEO salaries.
Effect of "Excess" CEO Pay
Like TSR and CEO pay growth, excess CEO pay is a factor in shareholder voting on pay, but only if the ISS gives a 'in favor'. For companies with the highest 'excessive' CEO compensation, shareholders give 7.3% less support than for companies with the least. The 'against' recommendation appears to dominate shareholder voting, overshadowing the effects of TSR, CEO pay growth, and CEO pay inflated.
Only when ISS gives a "yes" recommendation do shareholders do their homework and withdraw some of their votes.
Multivariate Analysis: Sorting out Factors
SAY-ON-PAY IN 2012 PROXY SEASON
But say-on-pay voting during the 2011 proxy season did not, as some had predicted, lead to widespread shareholder backlash against rising executive pay. As interesting as say-on-pay voting was during the 2011 proxy season, the aftermath of the first year of say-on-pay was perhaps even more interesting. Next, we look at the say-on-pay commentary before and during the 2012 proxy season.
Preparing for Say-On-Pay in 2012: Aftermath of 2011Companies during the first proxy season of Say-On-Pay in 2011.
Getting Ready for Say-On-Pay in 2012: Aftermath of
Company Responses to Say-on-Pay in 2011
We then examine how "say in pay" has affected recent pay practices—and corporate governance dynamics—at four target companies. We find that "say in pay" in 2011 appears to have been the beginning of a trend in which ISS and institutional shareholders have taken a much larger role in setting the agenda for US executive pay. In addition, some companies prior to the 2011 proxy season revised their executive pay programs by "minimizing non-performance-based pay, such as gross taxes, executive terms and large severance agreements") or by improving relationship between pay and performance."' According to the Conference Board, forty-six percent of the companies in their study "eliminated [or reduced] non-performance-based pay elements" in anticipation of the 2011 vote to said pay.112 The Conference Board found that six companies improved pay-performance relationships with changes in company guidelines on CEO stock ownership13 and another thirty-four revised the standards for "returning" executive pay to after.
Also before the "say-on-pay" vote in the 2011 proxy season, many companies revised their proxy disclosures of executive pay to try to make the disclosure not only compliant, but also informative and persuasive.
Company (and Shareholder) Responses to
Reflecting on the aftermath of the 2011 proxy season, the ISS noted that 'say-on-pay' appeared to have changed the dialogue between shareholders and management, with shareholders less likely to resort to 'no' or 'withhold' in 2011 ' of voting on directors.125 In other words, instead of expressing their dissatisfaction with executive pay by voting against certain directors, shareholders used the 'say-on-pay' vote to express their views on compensation practices. As some commentators noted, the directors slated for election in 2011 were “re-elected with the highest average level of shareholder support in the past five years.”126 While ninety-one directors in 2010 and ninety-three directors in 2009 failed to gain majority shareholder support , the number of directors who did not receive such support in 2011 fell to forty-five.127 To the extent that shareholders voted against individual directors, reasons other than membership of a controversial compensation committee dominated their reasons for not re-electing directors, including "poor attendance at meetings and the inability to put a poison pill to the shareholders' vote". Nevertheless, this diversion of shareholder attention away from directors during the 2011 proxy season did not happen for directors on the compensation committees of companies with failed say-on-pay votes.
But when management didn't offer a proposal to have a say on pay, ISS suggested a "negative vote would apply to members of the compensation committee." Id.
Shareholder Litigation Following Failed 2011
Fearing litigation after a failed pay vote, after the 2011 proxy season, company advisers recommended that companies change their "CEO performance evaluation process" and "put the company in a more favorable position" to avoid a negative vote or "protect against such a lawsuit .”138 Directors were also advised to “be particularly sensitive to the deliberative process that leads to payment decisions and the way in which that process is documented.”13 9 Directors in failed companies did not just say -votes in favor payment were sued, but so were "outside compensation consultants" for allegedly. 34;aiding [the director] and aiding [the director] in breach of duty of loyalty" as well as allegedly breaching their consulting contracts.140 This risk may in turn lead to higher fees for consulting and "stricter compensation provisions" in consulting contracts with at-risk clients.141.
Say-on-Pay in 2012: Early Results
As in 2011, commentators have concluded that ISS recommendations continue to play a key role in the paid voting process.159 As of June 22, 2012, ISS had issued negative recommendations in 14%. These estimates compare with our finding of an ISS effect of 28.2% in 2011 in companies receiving a negative ISS recommendation.165. Corporate advisers have told their clients that they need to take proactive measures to ensure their say-on-pay proposals pass in 2012 and beyond.166 One law firm recommends that directors should: understand that where their executive pay practices differ from those desired by shareholders and their proxy voting advisors;.
These 2011 results are comparable to what we found in our sample, where 11.6% of companies received a negative ISS recommendation and 17.9% of such companies failed their paid-say vote.
Company Responses to Negative ISS
- Case 1: Shuffle Master
- Case 2: D isney
- Case 3: Adobe Systems
- Case 4: Huntington Bancshares
The Company believes that the negative shareholder vote was a result of the February 17, 2011 issuance of the ISS Proxy Advisory Services Report (the "Report"), which contained a recommendation against such an advisory vote based solely on the inclusion of the "modified" single trigger Lopez and the receipt of certain benefits from a "change of control" of the company. Prior to the shareholder advisory vote on the company's 2011 pay packages, the company received significant feedback from shareholders expressing dissatisfaction with the gross-ups.183 In response and before.
The company's 2012 proxy statement revealed that in line with its revisions to its executive pay program to align pay targets with.
