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2014 Proxy Season Review: Good Marks for Most U.S. Companies, but No Room for Complacency

September 19, 2014

From Towers Watson

Say-on-pay results from 2014 annual meetings reveal that, after four years of mandatory say on pay, most U.S. companies are achieving consistently strong shareholder support for their executive pay programs. While that may not be surprising following a year in which both the S&P 500 and Russell 3000 logged annual returns over 30%, focusing on market performance as the sole cause of the support short-changes the improved dialogue and engagement among companies and their shareholders since enactment of Dodd-Frank's say-on-pay mandate.

With about three-quarters of the Russell 3000 reporting annual meeting voting results as of June 30 (the cut-off date for our review), average support for 2014 say-on-pay resolutions is 90% of the votes cast, with just 2% of companies failing say on pay this year. Both measures are unchanged from results for all of 2013. Seventy-three percent of companies reported support from shareholders above 90% in 2014, a figure that has steadily increased from 70% in 2011, the first year of mandatory say on pay. Discretionary bonus awards and a perceived lack of rigorous performance hurdles were cited most frequently as the issues raising concerns in this area, as Figure 1 shows.

Figure 1: Most common pay-for-performance concerns cited by ISS in recommending against say-on-pay resolutions

2014 proxy season by towers watson


Source: Towers Watson Executive Compensation Resources. ISS areas of concern confirmed using ISS's Governance Analytics. Based on 265 companies that received an "against" recommendation from ISS thus far in 2014. Total exceeds 100% because companies can fall into more than one category.

Here are some additional insights from the 2014 results:

  • Pay-for-performance issues remain the primary factor driving shareholder opposition to say-on-pay resolutions. Proxy advisory firm Institutional Shareholder Services (ISS) cited pay-for-performance issues as a high concern at 82% of the companies receiving "against" recommendations for their say-on-pay resolutions in 2014, up from 78% in 2013 and 69% in 2011. Discretionary bonus awards and a perceived lack of rigorous performance hurdles were cited most frequently as the issues raising concerns in this area
  • A small minority of companies continue to tough it out, maintaining unpopular pay program designs and practices despite a history of shareholder opposition to their pay programs. Of the 2% of companies that failed say on pay in 2014, about a third (32%) failed another vote within the previous three years. Two companies have failed say on pay in each of the four years of mandatory votes.
  • Similar to last year, Russell 3000 companies outside the S&P 1500 accounted for the highest proportion of failed say-on-pay votes. Forty-three percent of failures in 2014 came from this group, which is down from last year, when 56% of failures came from these smaller companies. Mid-cap companies had the largest increase in the proportion of say-on-pay failures, as 29% of failed votes came from this group, up from 14% of the 2013 failed votes.

Vigilance Pays

Companies that receive strong support for their pay programs should remember that, as with stock returns, past performance is not an indicator of future say-on-pay success. A quarter of the companies that failed say on pay in 2014 had achieved support above 90% in the previous three years. And almost a third (32%) of the current Russell 3000 have received an "against" recommendation for say on pay from ISS at least once in the past four years.

Say-on-pay voting results since 2011 suggest that shareholders evaluate pay and performance within the context of each year and without regard to general market performance. While the annual total shareholder return for the Russell 3000 has fluctuated significantly in the four years of mandatory say on pay (about 15% in 2010, -1% in 2011, 14% in 2012 and up to 31% in 2013), key indicators of say-on-pay opposition have remained relatively steady. Proxy advisory firms recommend votes against say-on-pay at about 12%–15% of companies each year, average support has been about 90% and the say-on-pay failure rate has been about 2% each year. Consequently, companies will be well served to maintain ongoing engagement with shareholders about their pay programs, particularly when there have been significant shifts in pay levels, mix or incentive design and goal setting in a given year.