Say on Pay – Investors Will Not Hold Back

(September 24, 2012) — The battle for a say on executive pay is set to continue as investors consider it one of the leading ways to protect their rights as shareholders, a survey of the largest asset pools has found.

Some 80% of investors responding to a survey on the issue rated the value of a vote on pay at companies in which they held shares as either important or extremely important, according to consultant Soldali.

The survey took the views of 35 of the world’s largest investors, responsible for $13 trillion in assets.

More than three quarters of respondents said these votes should be taken annually, with two thirds suggesting the vote should be advisory rather than binding.

In terms of what factors shareholders consider when voting on remuneration packages, the highest overall vote went to “performance criteria for short/medium/long term incentives”, followed by company financial performance.

In the United Kingdom, a so-called ‘shareholder spring’ claimed the scalps of several chief executives as investors voted against remuneration packages. In the United States, large pension funds and other institutional investors rejected pay packages for more than 10 S&P500 company executives.

The survey suggested a company’s board chairman or lead independent director should establish a dialogue with investors who took issue with remuneration packages. More than three quarters said this was the line companies in receipt of a ‘thumbs down’ for its say on pay should take, followed by an instant revision to the remuneration policy. A simple letter of explanation to shareholders received little support.

In a separate report, investment consultant Mercer said remuneration committees should become more pro-active in addressing pay issues within their companies.

The report said: “Mercer believes that pay policy must be communicated clearly in remuneration reports and the strength of the link between pay and performance should be underlined. Specifically, the consultancy believes that in the remuneration report, remuneration committees should provide a clear explanation, in the event that it occurs, as to why executive pay is increasing at a higher rate than that of the employee.”

Despite seemingly leading the charge on governance issues, the Sodali survey found investors considered proxy agencies relatively unimportant to their decision-making concerning say on pay.

The Sodali report said only 5.7% of respondents would “fully trust the analysis and judgment” of proxy advisors, while 57% said proxy advisors were “helpful but they would also review the company’s information and establish dialogue when appropriate.” Just over a third said proxy advisors’ views were “informative only but [they] would trust their analysis when strong misalignments with market practices are highlighted.”

However, a study on shareholder voting in March showed listed companies were taking increasing notice of proxy voting advisory firms when shaping executive pay packages.

A survey by The Conference Board, Nasdaq and The Rock Center for Corporate Governance at Stanford University found ISS and Glass Lewis offered the same advice on votes 75% of the time, offering substantial influence over a company vote.

During the 2011 proxy season, no company that received a positive recommendation from ISS failed its say on pay vote. Some 12% of companies that received a negative recommendation from ISS failed their say on pay vote.