September 28, 2011

Say on Pay: Why Companies Failed

This article originally appeared on Robin A. Ferracone’s “Executive Pay Watch” blog on Forbes.com.

In December 2010, I launched the “Executive Pay Watch” blog with the post “What Investor’s Want in the Age of Dodd Frank.” Over the past year, my colleagues at Farient Advisors and I have spent a lot of time with investors to better understand what they want from the companies in their investment portfolios.

In late May, Farient was commissioned by the Council of Institutional Investors (CII) to research and analyze investor motivations to vote against “say on pay” at companies where the proposal failed to receive majority support at the 2011 annual meetings. In this inaugural year of say on pay, investors had a voice in how top executives are paid. The research highlights how investors used this voice in making very thoughtful decisions as they exercised their say on pay votes.

Yesterday, at CII’s 2011 Fall meeting in Boston, my colleague Dayna Harris and I delivered the findings of our research: “Say on Pay: Identifying Investor Concerns.” The research draws on interviews with investors on why they collectively voted against the 37 companies whose pay plans fell short of majority support between January 1 and July 1, 2011.

Some highlights from the research include:

  • Investors voted against executive compensation for four primary reasons: pay for performance disconnect (92 percent); poor pay practices (57 percent); poor disclosure (35 percent); and unreasonably or inappropriately high compensation (16 percent).
  • Investors evaluated performance and pay over multiple years.
  • Investors focused their time on in-depth analysis of pay at “outlier” companies, i.e., those with the largest disconnect between pay and performance and/or those with the most egregious pay practices.

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But don’t be fooled by the 2 percent failure rate (i.e., the percentage of companies that did not win majority support) on say on pay.  By and large, investors say that they applied a “light touch” in 2011, and believe that corporate America still has some work to do on executive compensation.

I encourage you to follow the link to the full report on the Council of Institutional Investors’ website.  It lets you hear their opinion – straight from the investor’s mouth.

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Robin A. Ferracone is the Executive Chair 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 recently published 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@farient.com.

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