Say on Pay Drives Compensation Program Changes

Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Russell Miller and Yonat Assayag of ClearBridge Compensation Group.

The arrival of say-on-pay (SOP) votes has renewed the focus of directors and senior management on striking the right balance between designing an effective executive compensation program that supports the company’s strategic business objectives and one that is sensitive to shareholder perspectives. As a result, many companies made changes to their compensation programs this year, aimed at enhancing the relationship between pay and performance in preparation for their first SOP votes. This report examines the changes made by some Fortune 500 companies and includes recommendations for companies to consider in their 2012 compensation decision-making.

An analysis of the first 100 proxy filings by Fortune 500 companies (First 100) subject to shareholder advisory votes under the Dodd-Frank Wall Street Reform and Consumer Protection Act demonstrates some of the real effects SOP has had on executive compensation. [1] A key learning from those filings is that companies that perform and successfully demonstrate that their pay programs support and drive performance are more likely to win shareholder SOP votes.

Mandatory SOP had been on the horizon for U.S. publicly traded companies and a topic of boardroom discussion for several years. Certainly, well before SOP became a requirement, shareholders were able to express their opinions on executive compensation through other shareholder votes, such as director elections and equity plan proposals. This proxy season marked the first in which U.S. publicly traded companies (excluding smaller reporting companies) were required to hold non-binding shareholder votes on their executive pay programs (say on pay), the frequency of future SOP votes (say on frequency) and golden parachute payments in the event of a transaction (say on golden parachutes). Based on the results of SOP votes among the First 100 companies and at the 37 companies that received negative shareholder SOP votes, as of September 1, 2011, we can observe some of the effects SOP has had on executive compensation.

Compensation Program Changes among the First 100

Compensation program changes made by the First 100 to enhance the relationship between pay and performance were primarily centered on three areas:

  • 1. Minimizing non-performance-based pay
  • 2. Reinforcing shareholder alignment and/or enhancing the pay/performance orientation
  • 3. Improving disclosure to tell the pay-for-performance story

Minimizing non-performance-based pay Non-performance based pay elements such as tax gross-ups, executive perquisites and large severance arrangements are viewed as lightning rods by many institutional investors and shareholder advisory groups. Perhaps in an effort to avoid the inevitable scrutiny and criticism, many of the First 100 reduced, and in some cases, eliminated non-performance-based pay elements.

  • Excise tax gross-ups Nearly 40 companies, including AT&T and OfficeMax, eliminated excise tax gross-ups (either from existing or future arrangements).
  • Perquisites Ten of the First 100 disclosed that they reduced or eliminated perquisites, such as country club memberships and financial planning, to the CEO and other named executive officers.
  • Severance multiples Three companies reduced severance multiples for the CEO from 3x cash compensation to 2x cash compensation. Six companies have a policy requiring shareholder approval of any payouts greater than 2.99x cash compensation, including one company (The Bank of New York Mellon Corp.) that adopted the policy in 2010. [2]

Reinforcing shareholder alignment and the pay/performance orientation Another key theme that emerged in the proxy disclosures of the First 100 was reinforcing alignment with shareholders and strengthening the pay/performance relationship through tools such as stock ownership guidelines and clawback policies.

  • Stock ownership While a CEO stock ownership guideline level of 5x salary is most common among the First 100 (50 companies), a growing number of companies have guidelines beyond 5x. In 2010, six companies increased their guidelines above 5x, resulting in 25 total companies with guidelines ranging from 6x to 10x.
  • Clawbacks Under Dodd-Frank, companies will be required to enhance “clawback” standards beyond current requirements. While specific guidance is still pending, among the 80 companies disclosing clawback provisions in their proxy statement, 34 recently adopted or enhanced these provisions. For example, some companies expanded the list of executives subject to clawbacks and expanded the items subject to clawbacks for the broader executive group.

Improved disclosure SOP has had a significant impact on how companies view their Compensation Discussion & Analysis (CD&A). Companies no longer consider the CD&A to be simply a compliance exercise. Rather, many are using the CD&A to tell their story and provide a clear business rationale for their compensation decisions. Many of the First 100 companies took a “layered” approach to their proxy disclosure, highlighting key program features and the alignment between pay and performance early in their CD&A, with supporting detail provided in later sections.

  • The prevalence of executive summaries among the First 100 more than doubled, from 30 companies last year to 65 companies this year. Companies focused their executive summaries on their pay-for-performance relationships, often enhancing disclosure from 2010 through graphical representations demonstrating the pay/performance relationship.
  • A few companies, including General Electric, [3] took this “layered” disclosure approach a step further and added a proxy summary at the beginning of the proxy statement. This disclosure highlighted certain information, such as 2010 compensation decisions and 2010 company performance, that could help inform shareholders on the key issues up for shareholder vote.
  • Several companies, including Kimberly Clark [4] and Lockheed Martin, [5] enhanced their pay-for-performance discussion by adding a comparison of total shareholder return (TSR) vs. CEO pay at the beginning of the CD&A. This level of disclosure may be a preview of the pending pay/performance disclosure requirement under Dodd-Frank, which may be effective in 2012.
  • Some companies have reintroduced the proxy performance graph, which compares the company’s TSR to the TSR of an index and peers over a multi-year period and is now a required 10-K disclosure item. Variations of this performance graph were included in proxy statements for BB&T, [6] Goodrich Corp., [7] and Honeywell International. [8]
  • While companies discussed their performance in terms of various financial, operating, and stock-based measures, graphical analysis of performance tended to focus on TSR. However, some companies, including Eli Lilly, provided graphical analysis of pay and performance based on measures such as revenue and earnings per share growth. [9]

Shareholder engagement Another effect of SOP has been an increased level of engagement with shareholders. Early in the proxy season, companies recognized the importance of knowing their shareholder base and understanding fully their policies on compensation and governance issues.

Determining when and how often to reach out to investors is a strategic decision companies should make each year. During this proxy season, a significant number of companies determined that engagement with shareholders following an “against” vote recommendation from proxy advisory firms (e.g., ISS and Glass Lewis) was critical to overcoming the negative recommendation. Among the First 100, seven companies, including Disney, Hewlett-Packard, and J.C. Penney, filed supplemental materials following ISS’s negative recommendation, in large part to defend their pay-for-performance orientation. This approach proved successful in swaying shareholder votes for many companies, providing further evidence that effective communication of the pay-for-performance story can influence shareholder votes.

SOP Voting Results Among the First 100

Among the First 100, all but two companies—Jacobs Engineering and Hewlett-Packard—garnered a majority of shareholder votes in favor of their executive compensation program. On average, 89 percent of shareholders voted in support of executive compensation programs, and 66 of the 100 companies received support from over 90 percent of shareholders.

Results for the First 100 are very consistent with voting results in the broader market. As of September 3, 2011, 2,704 companies [10] held SOP votes; 37 companies [11] (including Jacobs Engineering and Hewlett-Packard) failed to win majority shareholder support—less than 2 percent. A study of Russell 3000® companies indicates that almost 75 percent of companies passed SOP votes with more than 90 percent shareholder approval. [12]

Influence of Performance on Say-on-Pay Votes

The focus on pay-for-performance in company disclosure is warranted, given that performance, as measured by TSR, has a significant influence on the shareholder vote. As shown in Table 1, companies with stronger TSR on a one- and three-year basis were more likely to get FOR votes from shareholders on their executive compensation programs.

Not surprising, average TSR among those companies that failed to win majority shareholder support for their SOP votes was significantly below the broad market (based on the S&P 500), further supporting the conclusion that performance matters (Table 2). Average TSR among all publicly traded companies that have failed SOP is -1.3 percent on a one-year basis and -13.2 percent on a three-year basis.

The Pay-and-Performance Relationship

The results of the first SOP votes send a clear message that performance matters, and that pay that is disproportionate with performance can result in a negative vote, particularly if pay is high and performance is low.

An analysis of CEO total compensation [13] and TSR for the First 100 finds a relationship among CEO pay, company performance, and SOP votes. Companies in the First 100 that paid their CEO in the top quartile of all companies, but had one-year TSR that was in the bottom quartile (i.e., the companies that paid high and performed low), on average, had the lowest level of shareholder support for their executive compensation program. Also noteworthy, First 100 companies in the top quartile for TSR received, on average, more than 90 percent shareholder approval on say-on-pay regardless of how the CEO was paid. Conversely, First 100 companies in the bottom quartile for TSR performance received, on average, less than 90 percent shareholder approval, regardless of CEO pay.

For the 37 companies failing to receive majority shareholder support for their executive compensation programs, the rationale was often due to:

  • a perceived pay-and-performance disconnect (e.g., CEO pay increased in a period when TSR was negative or below the median of a comparator group), or
  • significant concern among shareholders about specific pay practices (e.g., large severance packages, excise tax gross-ups, or tax gross-ups on perquisites)

A review of the 37 failed say-on-pay companies indicates that for 27 companies, the CEO’s pay increased year-over-year while one-year and/or three-year TSR was negative.

Influence of Disclosure on Say-on-Pay Votes

Effective disclosure has had a clear impact on the say-on-pay votes. Companies that used a “layered” approach to their CD&A—and, in some cases, their full proxy statement, enjoyed higher SOP results, as compared with companies that did not. Seventy-one percent of First 100 companies that used executive summaries received FOR votes from at least 90 percent of shareholders. In contrast, of the companies without executive summaries, only 57 percent received FOR votes from at least 90 percent of shareholders.

Influence of program design on SOP votes As stated earlier, institutional investors and shareholder advisory groups are paying considerable attention to ensuring that companies limit nonperformance-based pay elements and enhance shareholder alignment (e.g., eliminating executive perquisites and increasing stock ownership guidelines). Despite this focus, there is little evidence, based on the results of the First 100 SOP votes, that these types of compensation practices had any significant influence on the outcome of the shareholder votes. A study of four compensation practices that are often a point of focus by shareholders and advisory groups—excise tax gross-ups, perquisites, stock ownership guidelines, and clawbacks—indicates that SOP votes for companies with those pay practices did not significantly differ from companies without them. Moreover, there is no discernable trend to suggest that any one pay practice alone will result in any particular voting outcome. While these practices individually do not seem to influence the SOP vote, when combined with other shareholder concerns (such as a pay and performance disconnect), there is the potential for these practices to swing the vote.

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Shareholder Preference for Annual Say-on-Pay Based on results at the First 100 companies and the broader market, it appears that SOP will become an annual event for most companies. While a majority of companies were recommending a triennial vote early in the proxy season, shareholders have since indicated a clear preference for annual SOP. As a result, the majority of later filers recommended annual votes.

Among the First 100 companies, 92 received majority shareholder support for annual votes. Of the 92:

  • Sixty-one recommended annual votes
  • Twenty-four recommended triennial
  • Two recommended biennial
  • Five did not make any recommendation

Seven companies received majority shareholder support for triennial votes, and one company received majority support for biennial. Of these eight companies, four (Hormel Foods, Tyson Foods, Franklin Resources and Publix Supermarkets) are family-controlled.

A Look Ahead to 2012

Much can be learned from the 2011 proxy season and incorporated into planning and compensation decision-making for 2012. A design that fully supports the business, aligns with shareholder interests, and is sensitive to shareholders perspectives is critical to the success of any executive compensation program. Companies should consider the following with respect to their compensation programs:

  • 1. Establish a transparent link between pay and performance Successfully demonstrating the pay/performance linkage is critical to gaining majority support of the executive compensation program. In particular, companies should:
    • identify the key measures of the company’s success;
    • determine how to assess actual performance (for example, should performance be compared to budget, relative to peers, or some combination of both?); and
    • determine how to assess pay (for example, should it reflect grant values or realizable gains?), and understand what influences pay.
  • 2. Aim to minimize nonperformance-based pay and enhance shareholder alignment While doing so may not be the primary driver for SOP vote outcomes, it can signal to institutional shareholders and advisory firms that the company takes shareholder views seriously.
  • 3. Engage with shareholders Proactive outreach to shareholders heavily influenced SOP voting outcomes this proxy season. Talk with top investors early in the season to gain insights on their compensation governance policies and their views of the company’s pay practices. Pay attention to proxy advisory firms’ influence, but also know that an “against” recommendation does not always translate into a failed SOP vote.
  • 4. Use proxy disclosure to your advantage Companies that use proxy disclosure to tell their story and incorporate user-friendly formats, such as executive summaries and charts, can provide clear understanding of their compensation decisions and effectively demonstrate the pay and performance relationship.


[1] Under Dodd-Frank, U.S. publicly traded companies (excluding smaller reporting companies with less than $75 million in public float) were required to hold non-binding shareholder votes on their executive pay programs (say on pay) and the frequency of future say-on-pay votes (say on frequency) for annual shareholder meetings held on or after January 21, 2011. Those companies were also required to hold shareholder advisory votes on golden parachute payments in the event of a transaction (say on golden parachutes) for proxies filed on or after April 25, 2011. Smaller reporting companies will be required to hold these votes for annual meetings on or after January 21, 2013.
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[2] The Bank of New York Mellon Corp. proxy statement, filed March 11, 2011 (
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[3] General Electric Co. proxy statement, filed March 14, 2011.
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[4] Kimberly Clark Corp. proxy statement, filed March 11, 2011.
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[5] Lockheed Martin Corp. proxy statement, filed March 11, 2011.
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[6] BB&T Corp. proxy statement, filed March 10, 2011.
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[7] Goodrich Corp. proxy statement, filed March 10, 2011.
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[8] Honeywell International Inc. proxy statement, filed March 10, 2011.
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[9] Eli Lilly & Co. proxy statement, filed March 7, 2011.
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[10] See Mark Borges’ Proxy Disclosure Blog, “This Week’s Say on Pay Roundup,” September 3, 2011, (
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[11] According to, three companies (Cooper Industries, Hemispherix Biopharma, and IsoRay) have questionable SOP vote results due to various interpretations of how shareholder votes should be counted.
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[12] Equilar, Voting Analytics: An Analysis of Voting Results and Performance at Russell 3000 Companies, July 2011 (
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[13] CEO total compensation, as reported in the Summary Compensation Table of a company’s most recent proxy statement.
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  1. By Compensation Insider - Share the knowledge - October 2011 | on Thursday, October 27, 2011 at 12:51 am

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