Compliance Week: What Was Said With Say-on-Pay Votes This Year
By Joe Mont
“The shocker to me is that out of the 54 companies that failed this year’s say-on-pay votes, 11 of them had passed with a 90 percent or higher vote last year,” says Steven Hall, founding partner and managing director of Steven Hall & Partners.
Hall said his analysts are still digging into data to better understand how and why this happened, but his initial conclusion is that stock price played a key role. (Indeed, Best Buy saw its stock price swing from $28 last December to the high teens this summer, and it swung from 97 percent say-on-pay approval last year to 68 percent against this year.) Going forward, “if [share price] is down and down significantly, you probably have a tough road ahead of you,” Hall says.
That poses significant problems for companies, Hall says, as many of their CEO pay plans are difficult to adjust once it emerges that shareholders are distressed by stock performance. Companies set base salaries at the start of the year, make equity grants for that year, and establish what bonus targets are. Given the prospect of a negative pay vote, “The only thing you can conceivably do is go in and say, ‘We give up, and we just won’t pay the CEO a bonus this year.’”
Say-on-pay votes were intended to be a barometer of how well a company has or has not structured its compensation program. From the perspective of a board’s compensation committee, then, “if you are a company that had a 90-plus vote, I would say you really shouldn’t go in and mess things up very much, because people think it is good,” Hall says.
Or at least, that’s the conventional wisdom. “Then you turn around and you are one of these 11 companies that finds out the stock went down, and all of a sudden everybody hates you,” Hall continues. “There is really nothing you can do to fix the problem other than to try to find a way to prop up the stock price, which isn’t really possible.”
Hall urges institutional investors to reassess their approach. A question he would ask portfolio managers: How do you benefit from voting against a company’s pay plans?
“Don’t you think you are potentially damaging your stock price and causing turmoil in the company, rather than working behind the scenes to help them understand the issues you have with them?” he asks. “If you thought it was fine last year, why don’t you think its fine this year, other than the fact that the stock price went down?”