Proxy season 2012 is now underway and many larger US public companies are expected to hold their second mandatory non-binding say-on-pay votes this year. As of the last week of April 2012, approximately 260 of the 3,000-plus companies that will hold say-on-pay votes this year have already done so. Based on these meetings and proxy materials filed with the US Securities and Exchange Commission by many more companies, we are already seeing some important trends.
First, with respect to vote results, this season is starting out pretty much the same as the 2011 season ended. With respect to the 8 percent of companies that have already held say-on-pay votes for the current year, five companies have failed to obtain 50 percent support, 71 percent have passed with over 90 percent support, and 91 percent have passed with more than 70 percent support.
Second, proxy advisers continue to be very influential, with Institutional Shareholder Services (ISS), the largest and the most influential US proxy adviser, recommending negative say-on-pay votes at approximately 16 percent of the companies that have met in 2012 (up from 12 percent in 2011). On average, shareholder support has been 27 percent lower at companies that received negative ISS recommendations.
Third, continuing last year’s trend, companies are publicly challenging negative proxy adviser recommendations, some anticipatorily in their initial proxies, often without naming the proxy advisers though clearly targeting their voting policies, and others in response in supplemental proxy materials. As of the end of the last week of April 2012, 35 companies had already filed supplemental materials calling out proxy advisers and challenging their negative recommendations.
Fourth, it is already clear that the major battleground this year will be on the issue of how well company executive pay aligns with company performance, so-called “pay for performance.” While this was also the single most frequently disputed issue in 2011, pay for performance will be an even bigger issue this year.
ISS fired the first salvo on the 2012 pay for performance front by substantially revamping its blunt 2011 voting policy. While ISS’ 2012 pay for performance policy is a substantial improvement over its 2011 policy, it still leaves much to be desired. In response to the problems with ISS’ 2011 and 2012 pay for performance voting policies, compensation consultants and other proxy advisers have raced to gather data and build better analytical models to compete with ISS, and to provide investors with more meaningful data and analytics on company pay and performance. These analytics attack the ways in which ISS determines peer groups for applying its tests, its exclusive focus on total shareholder returns (stock appreciation plus reinvested dividends) as the only measure of a company’s performance and its use of pay opportunities rather than realizable or realized pay to determine executive pay. This competition in the market should elevate the quality of the debate on pay for performance, result in more thoughtful and holistic analyses than in the past, and hopefully begin to define the boundary between legitimate shareholder involvement and micromanagement of executive pay plans.