(September 28, 2011) — A new report by the Council of Institutional Investors has shown that about 92% of shareholders have expressed discontent over executive pay relating to performance at the companies they invest in.

CII’s research found that 37 companies fell short of majority support out of 2,340 say-on-pay votes at US companies in the first half of the year.

The report — titled “Say on Pay: Identifying Investor Concerns” and prepared by Robin Ferracone, executive chair, and Dayna Harris, vice president, both of Farient Advisors — focused on 2011, the first year say-on-pay voting was required at US companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act. In January, the Securities and Exchange Commission (SEC) adopted rules that would give shareholders at public companies a nonbinding vote on executive compensation packages, reflecting an effort to give shareholders greater authority over executive pay following the financial crisis, when many investors expressed public outcry over extravagant pay practices. Investor advocates, pension funds, and shareholder groups have pushed for such a change.

“Advisory shareowner votes on executive compensation were the big story of proxy season 2011, the inaugural year for ‘say on pay’ at most US public companies,” CII’s report stated. “Say on pay gives shareowners a voice in how top executives are paid. Such votes are also a way for a corporate board to determine whether investors view the company’s compensation practices to be in the best interests of shareowner.”

The report urged that companies “should respond to investor concerns. The more aligned pay and performance the better,” the report said. This alignment “is a combination of pay sensitivity to changes in performance, the overall size of compensation and the proportion of performance-based pay.”

CII members including the California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS) and New York State Common Retirement Fund cited a range of important factors to explain their reasons to vote against executive compensation, which included poor pay practices (37%), poor disclosure (35%) and inappropriately high level of compensation for the company’s size, industry and performance (16%). Furthermore, the report said that more than a quarter (27%) of the companies with failed say-on-pay proposals were in real estate, homebuilding or construction-related businesses, all hit hard in the economic downturn.

This report specifically examines:

1. The driving factors that fueled majority opposition to say on pay at 37 companies

2. The process investors used to determine how they would cast say-on-pay votes

3. The influence that say on pay is having on executive compensation

4. Potential next steps for shareowners to consider ahead of say-on-pay votes next year

5. Potential next steps for companies where investor opposition to say-on-pay proposals was significant

A recent survey by Towers Watson revealed that the say-on-pay proxy season has had relatively little immediate impact on most public corporations in the US.

“Most companies are breathing a sigh of relief now that the proxy season is over,” Doug Friske, global head of Towers Watson’s Executive Compensation consulting practice, said in a statement. “The same, however, can’t be said for many companies that received an ‘against’ recommendation from proxy advisory firms or failed to win the support of at least 80% of the shareholder votes cast on their say-on-pay resolutions. The survey findings, along with our consulting experience, suggest that these companies are taking shareholder views quite seriously and plan to respond in some way.”