On October 9, 2012, Bloomberg BNA’s Pension & Benefits Daily published this article by Exequity’s Ed Hauder. The article looks at companies whose say-on-pay (SOP) votes failed in 2011 and have reported their SOP votes for 2012, some of the actions these and other companies with failed SOP votes can take to turn things around, as well as the success this group of companies had with their 2012 SOP votes, and includes charts looking at 2011 and 2012 SOP votes, change in CEO total compensation, and TSR and percentile rank against companies’ GICS groups.
Since April 3, 2012, a few more companies have filed additional proxy materials to support their SOP votes (click on the company name to be taken to the materials they filed with the SEC):
April 4, 2012: United States Steel Corporation filed material to refute a negative ISS SOP vote recommendation, primarily by objecting to the ISS peer group and offered its own P4P analysis using the company’s own peer group.
April 5, 2012: Life Technologies Corporation filed material to refute a negative ISS SOP vote recommendation, objecting to the peer group ISS used, offering a P4P analysis using the company’s own peer group as well as raising the total returns the company has enjoyed versus CEO compensation.
April 12, 2012:
Janus Capital Group filed a lengthy presentation that walks through what it had done to address shareholder concerns expressed through the failed 2011 SOP vote as well as why it believed pay and performance were aligned and thus why shareholders should not follow the ISS vote recommendation against the SOP vote.
NCR Corporation filed materials to refute a negative ISS vote SOP recommendation. The materials laid out the company’s arguments that it did align pay with performance and offered a realized pay chart to back up that assertion, that the company’s CEO was an outstanding leader who deserved an opportunity to earn above the 75th percentile compared to the company’s peers, that it is in the interests of shareholders to retain the CEO and that ISS’s analysis was flawed because it underestimates the company’s operating results.
April 13, 2012: NYSE Euronext filed materials to oppose the negative SOP vote recommendation issued by certain proxy advisory firms. The company argued that its core financial performance was strong and that compensation should be evaluated against an appropriate peer group. The company then detailed recent compensation actions which show P4P alignment and detailed additional best practices it is following.
April 16, 2012:
Consol Energy Inc. filed materials to oppose a negative ISS SOP vote recommendation. The materials detailed financial performance in 2011, compared key metrics to those of peers, detailed the actions it took in response to its 2011 SOP vote and detailed why it believes ISS’s analysis is fundamentally flawed in a number of respects.
Health Care REIT, Inc. filed materials to oppose the negative SOP vote recommendations issued by ISS and Glass Lewis. The company details its performance, describes why the CEO received a $1 million equity grant (to extend his employment agreement), takes on the ISS analysis and then offers a comparative analysis for shareholders.
April 17, 2012:
Hess Corporation filed materials to oppose the negative SOP vote recommendations issued by ISS and Glass Lewis. The company details the actions it took to align P4P in 2011, indicates that ISS and GL did not give proper credit to its new relative TSR plan, and argues that ISS’s peer group is flawed and that ISS’s stock option valuations are misleading.
Laboratory Corporation of America Holdings filed materials to oppose a negative ISS SOP vote recommendation (noting that Glass Lewis supports the SOP vote this year as it did last year). The materials pick up some discrepancies in the ISS Proxy Report (SOP against recommendation when Compensation GRId subscore had a “low” concern, etc.), and then argued that the ISS peer group was flawed and that if ISS had used the company’s own peer group it would have reached a different conclusion.
Marriott International, Inc. filed materials to oppose a negative ISS SOP vote recommendation (and noted that Glass Lewis issued a “For” vote recommendation on the SOP vote). The materials argue that ISS fails to adequately recognize the favorable impact on shareholder value of the timeshare spinoff and argues that the company’s programs are tied to long-term value.
On January 25, 2012, ISS posted its first set of compensation frequently asked questions (FAQs) about its 2012 policies. The policies covered include: Pay-for-Performance, Management Say on Pay Responsiveness and Equity Plans. Below is a summary of the FAQs that were presented for each policy.
CEOs who have not been in their positions for 3 years will be subject to the Quantitative Analysis under the P4P policy.
For years in which a company has more than 1 CEO, ISS will use only once CEO’s pay, generally the CEO who was in the position at FYE.
ISS will annualize the salary of a CEO serving for less than 1 year.
If a company has co-CEOs, ISS will use the CEO with higher total compensation.
TSR generally will be calculated from the last day of the month closest to the subject company’s FYE.
For companies with early meetings in 2012, ISS will use the latest available compensation data, which may be from the prior year (2010).
ISS does not include the subject company in determining the peer group median CEO pay or count it in achieving the minimum 14 peer companies.
An adverse P4P recommendation that is attributed to non-performance-based equity awards when there is an equity plan on the proxy may lead ISS to recommend against the equity plan proposal .
If a company has not been traded for a full 5 years, ISS will still apply the Quantitative Analysis; if traded less than 3 years, ISS will still apply the 1-year RDA and the MOM.
ISS will continue to define pay as Summary Compensation Table pay, with its own valuation of stock options.
Swings in pension amounts will not automatically be exempted from ISS’s Quantitative Analysis, but ISS may consider the underlying cause as part of its Qualitative Analysis.
ISS will look at companies that are in the Russell 3000 Index as well as company-selected peers outside the Russell 3000 Index if they meet ISS’s peer company requirements and could then be used in other P4P analyses after the next update of peer groups.
A company will not always be at the median of its peer group.
A company will have more than 14 peers if within the same 6-digit GICS group (up to 24 companies can be selected).
The minimum number of peer companies isn’t really 14, it is 12. In a limited number of cases, when size and industry parameters are difficult to satisfy, ISS may use a minimum 12-member peer group.
Companies’ commitments to strengthen their pay for performance alignment are not as relevant given the annual management say on pay votes.
Management Say on Pay (MSOP) Responsiveness
All companies, regardless of the results on their last MSOP vote, should highlight how they are improving their compensation programs.
ISS will take into consideration shareholder engagement and actions taken in response to shareholder desires. But, ISS will also consider the nature of the issue(s) perceived to have caused a high opposition to the MSOP vote and their impact going forward.
A low or negative vote on MSOP will roll over and affect ISS’s voting recommendation on the election of directors(assuming an MSOP is on the proxy) under two conditions:
If an issue is deemed sufficiently egregious to warrant that, even if MSOP is on the ballot; and
If ISS determines that the board has failed to respond adequately to issues that led to high opposition to the prior MSOP proposal.
ISS will apply a full analysis, including SVT analysis, for all equity plans put up for shareholder approval, for any reason, for the first time following a company’s IPO.
ISS has changed the volatility and dividend yield assumptions for purposes of the ISSue Compass model. Volatility will now be measured on a 3-year historic basis as of the applicable quarterly data download date. Dividend yield will now be determined using the historic 5-year dividend yield average.
Several companies have gone on the offensive this year when ISS issued negative vote recommendations against their proxy proposals, especially in the context of failing the ISS pay-for-performance policy. These companies include Hewlett Packard, Headwaters, Disney and Tyco International. These companies waited for ISS to issue its negative vote recommendation and then filed additional supplemental proxy materials which were then used in contacting their top shareholders and lobbying for their support of the proposals. In one instance I’m aware of, the one-on-one lobbying had a dramatic impact on the voting and the company prevailed on its say on pay proposal as a result.
Here are links to the supplemental materials that each of these companies filed: