October 17, 2012
The first two years of mandatory say-on-pay votes for the majority of US public companies have taught us much about the executive pay issues that are important to institutional investors and proxy advisers, the importance of good pay practices and how pay design affects say-on-pay vote and director election results.
This lw.com Q&A with Latham & Watkins partners Jim Barrall and Bradd Williamson examine the trends that have emerged to date in 2012 and look ahead to 2013.
How would you characterize the influence of proxy advisors in 2012 compared to 2011?
Barrall: In 2012, we saw that proxy advisers continue to have substantial influence. ISS recommended “Against” say-on-pay votes at 14 percent of the companies — that’s up from 12 percent in 2011. On average, shareholder support was 30 percent lower at companies with ISS “Against” recommendations — versus 25 percent lower support in 2011. Glass-Lewis influence is not as clear because they do not publish their numbers quite as handily, but their influence is apparently growing.
The proxy advisers — it is important to note — are not just influential in their recommendations but in actually formulating the pay voting policies. Long before they make their voting recommendations, they come up with voting policies on pay practices, which even some investors who say they have their own guidelines copy fairly extensively.
How have companies responded to negative proxy adviser recommendations?
Barrall: In 2012, companies responded aggressively to negative proxy adviser recommendations. Some companies did that anticipatorily in their initial proxies. This year, we saw a big number of supplemental proxy solicitation materials filed — as of September 5, 112 companies had done that. This is substantially up from 2011, when there were about 70 to 80 — mostly on pay-for-performance grounds.
Companies also reached out to shareholders before, during and after the proxy season in important ways. Looking forward, companies need to continue to engage with their most important investors on pay matters, address their concerns and reflect their decisions and analytics in their proxies, to have more successful votes and avoid filing supplemental solicitation materials.
What should companies be doing now to prepare for the 2013 proxy season?
Williamson: As the 2013 proxy season approaches, you have to take pay-for-performance into account in making year-end 2012 pay decisions and designing 2013 plans. You also have to review 2012 say-on-pay vote outcomes for the company and peers, and the proxy adviser analyses and recommendations.
One thing in particular to be on the lookout for are the changes that will be announced by ISS, Glass-Lewis and others. The ISS rules changed significantly between 2010 and 2011; we expect that they will change this fall, but not so dramatically.
What are some of the Dodd-Frank Act developments on the horizon that companies should be aware of?
Williamson: The Dodd-Frank Act requires a lot of rulemaking — particularly pay-for-performance disclosure, which people have been waiting for several years. It also requires additional rulemaking regarding CEO pay disparity disclosure, clawback policies and disclosure, and hedging policies disclosure. The SEC has removed these items from its rulemaking schedule and now lists them as “pending.” It’s not clear when they will be adopted. The SEC has issued Compensation Committee independence rules.*
*Editor’s Note: Following this webcast, the NYSE and NASDAQ proposed listing standards as required under these rules.
About the Webcast
The “Thoughtful Pay Planning in a Say-on-Pay World: Important Pay Design Issues to Consider in Planning for 2012 Year-End and 2013 Pay Decisions” webcast presents a practical discussion by members of Latham's Benefits and Compensation Group and Semler Brossy Consulting Group of some of the critical questions that companies should now be considering.
The webcast will be available until January 24, 2013 at 02:30 PM Pacific Standard Time.