Parsing the Early Say-on-Pay Votes

The vast majority of companies so far have gotten the thumbs up from investors on their pay plans, but getting investors to approve a biennial or triennial say-on-pay vote frequency is proving a tougher sell, early voting results show.

Of 95 companies that held say-on-pay votes as of Feb. 25, 93 had favorable votes. The vast majority of those won more than 90 percent of the votes cast, according to an analysis of the first month of proxy filings under the final Securities and Exchange Commission rules by Schulte Roth & Zabel. Companies, however, haven't had as much luck on their frequency recommendations.

In particular, triennial SOP vote recommendations, the overwhelming choice among boards of the 93 companies that have held frequency votes so far, have had mixed success. While 52 of those companies recommended triennial votes, just 27 won majority support for triennial votes from shareholders. Of nine companies that recommended biennial votes, only three won majority support. Meanwhile, all 24 of the companies that recommended annual votes won a majority of votes cast, according to the Feb. 25 SRZ alert.

Investors favored annual votes at five of the seven companies where the board declined to make a frequency recommendation. Biennial and triennial votes each received support at one company, but those companies both had significant insider ownership, which may have made the outcome a fait accompli, according to authors Michael Littenberg, Farzad Damania, and Justin Neidig.

At companies with a market capitalization in excess of $5 billion, shareholders only supported a biennial or triennial recommendation in three out of 14 instances. At two of those companies, insiders held more than 50 percent of the voting power. Meanwhile, at companies with market caps between $1 billion and $5 billion, shareholders supported a biennial or triennial recommendation at 1 out of 9 companies. Again, insiders there held in excess of 50 percent of the voting power. Among companies with a market cap of less than $1 billion, shareholders supported a biennial or triennial recommendation in 26 out of 38 cases. Seven of those companies had insider voting control of between 20 percent and 50 percent, and another seven had insider voting control of in excess of 50 percent.

Meanwhile, frequency recommendations so far still favor triennial votes, according to ISS data cited in the alert. Of 213 companies that filed proxy materials as of Feb. 16, 126 (59 percent) recommended a triennial SOP vote, while 63 recommended annual, 13 recommended biennial, and 11 made no recommendation. Notably, just 31 of those were S&P 500 companies. That could change as more large companies file their proxy materials, Littenberg says. Many large companies, particularly those with less insider ownership and large institutional shareholder bases, are expected to recommend annual votes, which preferred by ISS and many larger pension funds.

“The visceral reaction of many companies before the proxy season started was to recommend a triennial vote,” says Littenberg. “Now that the early results are in, some companies are rethinking whether that's the best approach, especially if they don't think a triennial recommendation is likely to win shareholder support.”

Still, at the end of the day, “the real issue is the thumbs up or down on pay practices,” he says. So far, two companies, Jacobs Engineering and Beazer Homes, failed to win majority shareholder approval of their pay plans. While those votes have gotten a lot of attention, the vast majority of companies have seen their SOP votes win more than 90 percent support. “There was some concern early on that shareholders would ‘go off the reservation,' but most companies are getting significant shareholder support, not just squeaking by,” he says.

Notably, the alert highlights two commonalities between the two companies. At both companies, ISS took the position that CEO compensation wasn't in line with corporate performance, and plaintiffs' firms, in preparation for a possible lawsuit, have already announced investigations at both companies concerning breaches of fiduciary duty relating to historical and potential Named Executive Officer compensation.

In 2010, just three of roughly 290 SOP votes held failed to get a majority of votes cast in favor of NEO compensation. Given the larger number of SOP votes that will occur, Littenberg, like other observers, expects more negative votes this year.