Pay attention board members and compensation committees!
Investors said they are voting no against companies' say-on-pay proposals because of pay and performance disconnection (92 percent), poor pay practices (57 percent), poor disclosure (35 percent), and exorbitant compensation practices that do not match company's size, industry, and performance (16 percent). In addition, investors confirmed that they focused most of their time on comprehensive analysis on pay practices at companies with the largest discrepancies between pay and performance.
When determining their votes, investors admitted that due to resource constraints, they did use proxy advisory firms' analyses to a certain degree in the past proxy season in addition to using input from multiple sources in their analysis. Their performance barometer of choice was the total absolute shareholder return over the one-, three-, and five-year period.
Investors said they are keeping their focus on the chief executive officers' pay rather than other named executives. Their priority is to ensure that the overall CEO compensation remains reasonable when compared to the company's size, nature of business, and performance. Plus, investors only want to use say-on-pay votes as an opportunity to voice their concerns over the pay program rather than as a compensation oversight referendum.
The results were presented in the 36–page white paper, “Say on Pay: Identifying Investor Concerns,” released by the Council of Institutional Investors this week. Executive compensation consulting firm, Farient Advisor was commissioned by the Council to conduct the study among 19 council members from organizations such as U.S. pension funds, mutual fund firms, and union pension funds. The participants were interviewed and asked how they cast the say-on-pay votes last season.
Based on the study results, Farient recommended for investors to follow up with companies who had received a no-vote and check if the companies had implemented certain measures to mitigate the issues highlighted earlier. For companies who are preparing for the next proxy season, Farient advised they reach out to key investors and maintain a dialogue with them about the pay program. Providing clear and complete compensation discussion and analysis disclosures in the next season will also help to state your case, the firm said.