Update on Say-on-Pay Developments

There have been 40 failed say-on-pay votes thus far in 2012. Shareholders have disapproved executive compensation systems at companies such as Big Lots (31% approval), Cooper Industries (30%), Simon Property Group (27%), Pitney Bowes (35%) and Chiquita Brands (20%). Sometimes support from ISS is not enough – shareholders at Safety Insurance Group (42%) failed to approve a say-on-pay proposal even with an approval recommendation from ISS.

Nevertheless, shareholders of most companies, often by large majorities, continue to approve executive compensation systems put to a say-on-pay vote. According to Semler Brossy’s June 6, 2012 study of these votes at Russell 3000 companies, out of almost 1,600 companies that have held their meetings so far this year, say-on-pay votes at 1,172 companies passed with over 90% support, votes at 288 companies passed with support between 70% and 90%, and votes at another 94 companies passed with support between 50% and 70%. (The 70% threshold is important because ISS evaluates recommendations on say-on-pay proposals on a case-by-case basis in situations where a company did not reach the 70% threshold the prior year.) Naturally, Semler Brossy attributes many of the failed 2012 votes to negative total shareholder returns and poor financial performance.

Companies with failed or close to failing votes in 2011 generally have received significantly more support in 2012. (At this point only Hercules Offshore, Kilroy Realty and Tutor Perini have experienced failed say-on-pay votes in both 2011 and 2012.) One reasonable inference is that many boards of directors have responded to last year’s failed votes by implementing changes to their executive compensation systems. For example, Helix Energy Solutions Group saw its 32% support in 2011 jump all the way to 97% in 2012. Helix noted in its March 29, 2012 proxy statement that the company “engaged in discussions with institutional investors to gather feedback regarding [its] executive compensation program and conducted a comprehensive review of [its] executive pay program and philosophy.”

Helix made changes to its executive compensation program pursuant to its review and (in addition to public disclosure regarding material changes) sent correspondence to its top 20 investors summarizing the changes. The changes included adopting performance measures for the company’s short-term cash bonus program and reformulating long-term incentive compensation to increase the ratio of at-risk compensation (e.g., vesting of performance units based on total shareholder return compared to the company’s peer group).

Consistent with Helix’s approach, we have seen increasing engagement with institutional investors regarding the design of compensation systems in an effort to understand specific shareholder concerns, to find ways to address them consistent with achievement of other company goals and, in turn, to obtain significant majorities approving say-on-pay votes. We expect this trend to continue, particularly for companies with lackluster say-on-pay approval rates.