Putting an End to ‘Pay for Pulse’
October 16, 2012
This article originally appeared on Robin A. Ferracone’s “Executive Pay Watch” blog on Forbes.com.
I recently spoke with Karla Bos, vice president of Proxy Voting at ING Funds. Karla leads the proxy committee for nearly 200 U.S.-based mutual funds and manages a team responsible for all aspects of the funds’ proxy voting. Karla provides a unique perspective on how investors analyze CEO pay packages when casting their say-on-pay votes.
Robin Ferracone: How did you get into this field?
Karla Bos: After Sarbanes Oxley was enacted in 2002, I was not surprised that mutual fund proxy voting rules soon followed. At the time, ING Funds did not have a centralized approach to proxy voting, so it was my job to not only understand what the new rules might entail but also recommend a plan on how to handle them. Mutual funds had to adopt proxy voting policies, and we had to disclose what those policies were, and then disclose once a year how we voted. At ING, our fund boards agreed that we should centralize our proxy voting while creating a clear and consistent policy, and we created our in-house group at that time.
Robin: How has the thinking of institutional investors towards corporate governance evolved over time?
Karla: Many investors have determined that corporate governance issues are so fundamentally important to the investment process that they have developed sophisticated internal governance departments. It’s evolving constantly, and every year and every proxy season that goes by, we peel back the layers of the onion and discover more we should be thinking about.
Robin: When you think broadly about proxy issues, investors can vote on a number of items, including ratifying the audit firm and electing directors. How does executive compensation fit into how you look at governance?
Karla: Compensation has been front and center the last couple of years in a very positive way. It’s really interesting because there’s a lot of discussion among institutional investors whether say-on-pay should replace voting against directors for compensation concerns. That conversation will heat up in the next couple of years.
Say-on-pay is definitely a window into the governance of the company. In looking at examples of proxies this year, I was struck by a handful of companies that handled things very poorly, in my view, particularly when coming from a low vote on say-on-pay in 2011. In the most troubling cases, the proxy disclosure was dismissive of shareholders. There was either next to no disclosure or it was written in a way that said, “Trust us, stay back.”
Robin: What are the main red flags for you when you look at a company’s executive compensation?
Karla: Pay-for-performance is at the top of the list. I look for some linkage between shareholder returns and compensation, although returns are certainly not the only way to measure performance. There are of course a number of other poor pay practices that may, particularly in combination, cause us to cast a “no” vote. Probably the biggest will be a lack of performance-based compensation. I am usually concerned about pay packages that are all time-based, or in other words, if you stick around you get a payday. This has also been referred to as being “paid for pulse,” which of course is in contrast to “pay for performance.”
Robin: What do companies need to do to improve their executive compensation programs?
Karla: Institutional investors need disclosure — we really want companies to tell us their story. Engagement is really the key. Companies should engage with investors through disclosure, but also by meeting with them where appropriate. The best time to do this is well before the proxy is filed, when compensation committees are in the planning process. The middle of the proxy season is not the greatest time, although sometimes it’s necessary if there are questions.
Robin: Do you think that say-on-pay voting has the power to change behavior in how companies set executive compensation?
Karla: I do, because from what I’ve observed, boards are getting concerned over negative votes. I think that’s going to continue, and that’s where engagement can be productive. Particularly engagement from significant investors like BlackRock, who sent out letters to hundreds of companies this year saying they want to talk to them. That is powerful.
Robin: Recently the United Kingdom made their say-on-pay votes binding and Switzerland is considering the same. Would you like to see say-on-pay be a binding vote?
Karla: No, I would not. I’m very hopeful and optimistic with what we’ve seen so far with the advisory say-on-pay vote. We’ve seen increased engagement, and to some extent the “shame” factor at work. Interestingly, directors seem to be more concerned with a negative say-on-pay vote than they were with the high level of withholds on some of the directors. I’m pleased to see they’re taking this to heart.
Robin A. Ferracone is CEO of Farient Advisors, LLC, an independent executive compensation and performance advisory firm which helps clients make performance-enhancing, defensible decisions that are in the best interests of their shareholders. Robin Ferracone is the author of a book entitled “Fair Pay, Fair Play: Aligning Executive Performance and Pay,” which explores how companies can achieve better performance and pay alignment. Robin can be contacted at robin.ferracone@localhost and click here to sign up for Farient’s electronic newsletter.