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CII releases “say on pay” report examining investor voting motivations

The Council of Institutional Investors (CII) has released a report analysing investor motivation for voting against the “say on pay” proposal at companies where the motion failed to receive majority support at annual meetings this year.

The study, conducted by independent executive compensation and performance consultancy Farient Advisors, examines how the new “say on pay” regulations, which came into action this year, have worked, with a particular focus on meetings where a majority of investors voiced their disapproval over executive remuneration.

Under the “say on pay” provisions, companies are required to hold a non-binding “say-on-pay” vote which allows investors to inform the board if they support how it is paying its top executives.

The votes must happen once every three years in larger companies and companies must make public the results of the vote.

The report, Say on Pay: Identifying Investor Concerns, examines 37 companies whose pay plans failed to gain majority support from investors in the first half of the year.

The co-authors of the report – Farient’s executive chair Robin Ferracone (pictured) and vice president Dayna Harris – found that investors voted against remuneration plans for four main reasons.

These were: pay for performance disconnect (92 per cent); poor pay practices (57 per cent); poor disclosure (35 per cent); and unreasonably or inappropriately high compensation (16 per cent).

The authors drew on data from the 37 companies involved as well as conducting interviews with institutional investors, investment management firms, proxy advisers and solicitors, and company officials.

The report also found that investors evaluated performance and pay over multiple years, looking primarily at total absolute shareholder return (TSR) over one-, three- and five-year periods.

Investors also focused their time on in-depth analysis of pay at “outlier” companies – those with the largest disconnect between pay and performance.

The pay of the chief executive was the central focus of investors, who also looked at the overall “reasonableness” of the level of compensation as it related to the company’s size, industry and performance.

However, where investors voted against a say-on-pay proposal, it was seen more as a comment on that particular pay proposal rather than a more wide-reaching criticism of a company’s oversight of remuneration issues

The co-authors interviewed 19 council member organisations about how they cast their vote. This group was made up of nearly two-thirds public employee pension funds.

“This first year of mandatory say on pay has been a learning experience for all participants,” the co-authors say in the report.

“Farient encourages investors to conduct a ‘post mortem’ of their voting processes, including an assessment of any additional resources needed to evaluate say-on-pay proposals fairly and efficiently. Concerned investors should follow up to see what steps, if any, companies take in response to failed say-on-pay proposals and consider appropriate action.”

The report recommends that investors also broaden their analysis of companies and the methodology used for deciding on the appropriateness of executive pay proposals.

Total shareholder returns should not be the sole filter investors use to decide which companies deserve the most scrutiny, the report recommends.

“Problematic pay practices lurk at mediocre to modestly performing companies, too,” the co-authors say.

The report also recommends assessing performance-adjusted pay – that top executives could receive after performance is taken into account – particularly the performance-adjusted value of equity.

The co-authors say that the grant date value of equity incentives does not reflect the compensation that executives ultimately earn.

The Council of Institutional Investors is a prominent advocate for the say on pay and it issued a statement as part of the report.

“The council believes the report will benefit active investors by identifying compensation practices where support for change is the greatest,” CII says.

“It also could help them [investors] target initiatives for improved pay practices and provide useful input for structuring their voting policies. Companies will benefit, too, from knowing which compensation practices their owners view as detrimental to long-term shareowner value.”

To view the report click here.


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