September 27, 2011

ISS’s ’12 Policy Survey Results: A Peek Into Pay Practice Views

Yesterday, ISS released the results of its latest policy survey, which both companies and investors are invited to fill out. Although investors and companies appear to be on the same page regarding some pay practices, there are many where they may not be. Among the findings per Mike Melbinger in his blog:

– A majority of both investor (60%) and companies (61%) cited executive compensation as one of the top 3 governance topics for the coming year, similar to last year.

– Investors and companies had different views on when companies should address shareholder opposition during “say on pay votes.” On a cumulative basis, 72% of investors said there should be an explicit response from the board regarding pay practice improvements if opposition exceeds 30%. Among companies, 48% said an explicit response wasn’t necessary unless there was more than 50% dissent. (The most commonly cited level of opposition on a say-on-pay proposal that should trigger an explicit response from the board regarding improvements to pay practices was “more than 20%” for investor respondents.)

– A majority of investors (57%) indicated more engagement activity with companies in 2011. When asked about engagement activity with institutional shareholders, companies almost equally cited “about the same as in 2010” and “more engagement in 2011.”

– Pay levels relative to peers and a company performance’s trend are relevant for both investors and companies when determining pay for performance alignment. When determining whether executive pay is aligned with company performance, an overwhelming majority of investors considered both pay that is significantly higher than peer pay levels and pay levels that have increased disproportionately to the company’s performance trend to be very relevant. On the other hand, most companies indicated that both of these factors to be “somewhat relevant.”

– A majority of investors (57%) and 46% of companies agreed that discretionary annual bonus awards (i.e., those not based on attainment of pre-set goals) to be sometimes problematic if the awards are not aligned with company performance.

– Regarding new equity plans, responses from investor and companies varied as to whether positive factors, such as above median long-term shareholder return; low average burn rate relative to peers; double-trigger CIC equity vesting; reasonable plan duration; robust vesting requirements, should be taken into account to mitigate an equity plan where shareholder value transfer (SVT) cost is excessive relative to peers. Most investors were reluctant to indicate that any of those factors would “very much” mitigate the cost.

– Where SVT cost is not excessive and whether negative factors, such as liberal CIC definition with automatic award vesting; excessive potential share dilution relative to peers; high CEO or NEO “concentration ratio”; automatic replenishment; prolonged poor financial performance; prolonged poor shareholder returns, weigh against the plan, a majority of investors indicated all of the factors, with the exception of high CEO/NEO “concentration ratio,” should “very much” weigh against the plan.

– An overwhelming majority of investor respondents do not consider automatic accelerated vesting of outstanding grants upon a change in control or accelerated vesting at the board’s discretion after a change in control to be appropriate. The vast majority of companies disagree, and consider both scenarios appropriate.

During our upcoming pair of say-on-pay conferences (one regarding disclosure and one regarding pay practices – both combined for one price), come hear investor views from the investors themselves during the panel – “Say-on-Pay Shareholder Engagement: The Investors Speak” – featuring T. Rowe Price’s Donna Anderson; Cap Re’s Anne Chapman; Blackrock’s Michelle Edkins; CalSTRS’ Anne Sheehan and AFL-CIO’s Vineeta Anand. In addition, investors are sprinkled throughout the panels over the two days to help you learn their latest thinking.

Act Now: Come join 2000 of your colleagues in San Francisco – or thousands more watching live (or by archive) online – to receive a load of practical guidance and prepare for what is promising to be a challenging proxy season. Register now.

Beazer Home’s Say-on-Pay Lawsuit Dismissed

Last week, I blogged how the Cincinnati Bell say-on-pay lawsuit survived a motion to dismiss. Now the count is 1-1 since – as noted at the end of this Thomson Reuters article – a state court judge in Georgia dismissed the shareholder derivative say-on-pay lawsuit against Beazer Home with a ruling from the bench.

Meanwhile, Steve Quinlivan has analyzed the Cincinnati Bell decision and has identified errors in his “Dodd-Frank Blog” – and Marty Rosenbaum characterizes the decision as a “game-changer” in his “OnSecurities Blog.”

Webcast: “How to Handle Contested Deals”

Tune in tomorrow for the webcast – “How to Handle Contested Deals” – to hear Chris Cernich of ISS, Joele Frank of Joele Frank Wilkinson Brimmer Katcher, David Katz of Wachtell Lipton; and Paul Schulman of MacKenzie Partners discuss planning for and responding to deal contests.

– Broc Romanek