March 10, 2011

The Realities of Say on Pay: Proxy Season 2011

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

With Proxy Season 2011 in full swing and Say on Pay a reality, I am spending lots of time with investors and compensation committees. As our clients get clients ready for the 2011 and 2012 Say on Pay disclosures, I wonder how realistic it is to think that shareholders will have the resources to take a deep dive into the pay programs of the companies in which they have invested. I think it’s more likely that they will have to rely on the company or on shareholder advisory groups to make a convincing case one way or the other.

As of March 2, 2011, there have been 35 Fortune 1000 companies for which advisory vote results on compensation have been reported. For most of these companies (33 out of 35), the vast majority of their shareholders have voted affirmatively for their executive pay arrangements.  Last year, four companies, Motorola, Occidental Petroleum, KeyCorp, and Abercrombie & Fitch, received “no votes” from investors on their executive pay programs,  and this year, two companies, Jacobs Engineering (47%) and Beazer Homes (47%), joined their ranks.

In my experience, when investors say “no” to pay, they do so for three primary reasons.  The first is that they view executive pay as being too high; the second related reason is that they do not see the company demanding sufficiently high performance in return for the high pay; and the third is that they do not think that the pay programs and decisions are transparent enough, which implies that they do not trust that the board will make decisions on executive pay that are in their best interests.  The questions then for boards (and their compensation committees) are: (1) how can companies ensure that there is proper alignment between performance and pay; and (2) how can they demonstrate, in a clear, concise, and transparent way, that good performance and pay alignment exists?  Moreover, if the relationship between performance and pay is weak, how can they identify and fix any alignment issues up-front, before these issues become apparent to investors as they cast their Say on Pay votes?

The first step in answering these questions is to analyze the relationship between the company’s performance and its total executive compensation levels over time.  Although there are various ways to do this, many of our clients are using Farient’s Alignment Report™, which assesses a company’s performance-adjusted pay (i.e., total compensation adjusted for actual performance) relative to its actual performance, as measured by total shareholder return (TSR), over time, and does so in relationship to its peers or industry sector.  We say that performance and pay are aligned when total compensation, after performance has been factored in, is both:

— Sensitive to company performance over time; and

— Reasonable relative to the market for executive talent and for the performance delivered

This alignment tool visually shows whether or not these two conditions have been met.  If so, then the company has an easy way to communicate the integrity of the pay program to investors, leading to a “yes” vote on Say on Pay.  If not, the company has an opportunity to diagnose and correct the features of the pay program, or pay actions, which may have caused misalignment in the past, but will be corrected for the future, heading off a “no” vote “at the pass.”

The intent of Say on Pay was to create ongoing communication between shareholders and boards of directors. By keeping the lines of communication open, Say on Pay doesn’t have to be extreme – a crisis at one end of the spectrum or a “non-event” at the other.  Clear and proactive steps can be taken to ensure that Say on Pay becomes a useful communication platform between companies and their investors, and nothing more.  These steps are: (1) get the facts – do an alignment analysis; (2) diagnose any alignment problems and take corrective action, if needed, for the future; and (3) take your case for alignment to investors.  By taking these steps, companies can ensure, rather than merely hope for Say on Pay to be a “non-event.”


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.  She is the author of 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