February 18, 2011

As of today, more than sixty companies have indicated how their Say on Pay votes have gone.  So far, only two companies, Jacobs Engineering and Beazer Homes have experienced a no vote on their executive compensation.  The vote, as we have indicated, is non-binding, although the repercussions of such a no vote are likely to include substantial changes to the executive compensation structure at both companies.

There has been substantial debate in the blogosphere about what these results mean for other companies facing Say on Pay votes this year.  On the one hand, many commentators point out that two failed votes for more than sixty companies is hardly a trend, at least not a troublesome trend from management’s perspective.  Regardless, they point out—a failed vote of around 3% is a small relative rate.  On the other hand, others argue, going from a culture where management consistently got its way with respect to compensation, 3% is like going from no shareholder success to meaningful success in just one year, and that companies had better take heed.  It is perhaps worth noting that those who argue the current results suggest a troublesome trend for management often seem to have a stake in the outcome—that is, it is likely the higher the general concern about the increasing likelihood of a no vote, the more likely the commentator’s business would benefit from such concern.

Looking at the two companies subject to the no vote casts suspicion, at least to this point, as to how much should be inferred from the results to date.  Beazer Homes, as one might suspect for a builder in recent years, has achieved terrible operating results and has experienced even worse erosion in its stock price.  Five years ago Beazer’s stock traded at nearly $70.  Today it trades at around $5 and has traded below $1 within the last two years.  Notwithstanding this drop, CEO salary has stayed at a constant $1,200,000 for three years and a million dollar bonus was paid in 2010.  With stock awards, total pay has been reported in the Summary Compensation table at nearly $7 million for a company with a market capitalization of just a few hundred million.

Jacobs Engineering, while not experiencing quite the poor income and stock performance as Beazer Homes, has nonetheless experienced quite a drop in both over the last five years (compared to the markets as a whole which have increased over that time).  What is more, Jacobs Engineering made substantial stock grants that were not adequately disclosed until amended proxy filings were made.  Suffice it to say that both companies had high levels of pay in the face of dramatic drops in performance, both in absolute and relative terms.

Why are most companies receiving shareholder approval of their compensation packages but not prevailing on their three-year vote recommendations?  We suspect this has to do with the fact that investment funds such as Fidelity and Vanguard support an annual Say on Pay option even though such funds are more understanding of corporate pay practices themselves (more understanding that is, than their pension, governmental and union fund counterparts, which tend to apply more political correctness when assessing actual pay practices).  See the following article for a brief discussion regarding this issue, http://starglobaltribune.com/2011/executive-compensation-institutional-investors-demand-more-say-on-executive-pay-5127.  Notwithstanding this trend, it appears that the majority of more recent proxies contain management recommendations in favor of a three year vote period, the most notable exceptions being Synopsys and Champion Industries (which recommend an annual vote).

What is very clear is that shareholders are supporting annual Say on Pay votes.  This is true even when management has recommended triennial or biennial votes, and it is especially true for companies with larger market caps.  For an ongoing tally of the annual frequency votes, visit http://dodd-frank.com/category/executive-compensation/.  Equilar has also prepared an analysis though it only covers information available through February 1, 2011. Read more here.