This Alert is an update to last year's Client Alert on the same topic, which also discussed how to win a proxy fight despite a "no" recommendation from Institutional Shareholder Services ("ISS") and/or Glass Lewis. The leading force behind Say-on-Pay opposition and negative voting outcomes continues to be disconnects in pay-for-performance. In 2015, 86% of Russell 3000 companies receiving a "no" recommendation from ISS had a "high" level of concern for pay-for-performance. The second biggest concern on ISS's radar in 2015 was a lack of responsiveness to shareholders—almost 20% of companies receiving a "no" recommendation were so cited.
As we noted last year, ISS and Glass Lewis, as advisors to institutional shareholders, have a significant impact on the level of shareholder support for a company's Say-on-Pay and Incentive Plan proposals. In 2015, companies receiving a "no" recommendation from ISS received 31% less shareholder support than companies receiving a "yes" recommendation. If your company receives a "no" recommendation from either ISS or Glass Lewis, you should reference our Client Alert from last year for tips on how to fight and win a proxy fight over a Say-on-Pay or Incentive Plan proxy proposal.
An important step in preventing a "no" recommendation is knowing the proxy voting guidelines of your major shareholders in advance of your annual meeting when designing and implementing the CEO's pay at the beginning of (and during) the year and when disclosing the CEO's pay in the proxy statement. Some of the larger and more prominent institutional shareholders, who may not follow ISS's or Glass Lewis' voting recommendations, include: BlackRock, T Rowe Price, Vanguard, Fidelity, Morgan Stanley and State Street. This Alert includes a Summarized Chart of key points from each of these institutional shareholders.
One of the most significant changes we are seeing this year is that major shareholders and their advisors are beginning to focus more on whether performance goals are transparent and sufficiently rigorous.
For example, the primary policy update themes for 2016 are as follows:
- BlackRock – We may vote AGAINST a Say-on-Pay proposal if we identify a misalignment over time between target and/or realizable compensation and company performance. We consider factors such as inappropriate or non-rigorous performance measures or hurdles, whether compensation is insufficiently sensitive to company performance, and the key changes to pay components from previous years and consider the compensation committee's rationale for those changes.
- T. Rowe Price– We will vote AGAINST a Say-on-Pay proposal where there is an unacceptable number of problematic pay elements such as (i) the presence of objectionable structural features in the compensation plan such as automatic benchmarking of pay in the top half of the peer group or (ii) a lack of proportionality in the pay plan relative to the company's size and peer group.
- Vanguard – In evaluating Say-on-Pay proposals, we consider a number of factors, including the amount of compensation that is at risk, the amount of equity-based compensation that is linked to the company's performance, and the level of compensation as compared to industry peers.
- Fidelity– We will generally vote FOR proposals to ratify executive compensation unless such compensation appears misaligned with shareholder interests or otherwise problematic, taking into account the structure of the compensation program, including factors such as (i) whether incentive plan metrics are appropriate, rigorous and transparent; (ii) whether the long-term element of the compensation program is evaluated over at least a three-year period; (iii) the sensitivity of pay to below median performance; and (iv) the amount and nature of non-performance-based compensation.
- Morgan Stanley– We review remuneration structures and potential poor pay practices, such as relative magnitude of pay, internal pay equity and peer group construction. As long-term investors, we support remuneration policies that align with long-term shareholder returns.
- State Street– Shareholders should have the opportunity to assess whether pay structures and levels are aligned with business performance on an annual basis.