Pallid Responses to Pay Votes

While there are companies that make true changes to compensation there are others whose response to shareholders seems minimal at best.

As I noted here there were 16 companies where CEO pay declined by 20% or more according to the New York Times analysis. The number of companies where pay increased by 20% or more was 56, and of those 21 had pay that increased more than 100%.  Among those where pay increased were several companies who had fairly low levels of support that prior year.

Activision Blizzard took action to lower the CEO’s salary (effective January 1, 2017) and eliminated an automatic salary increase in his employment agreement in response to two years of support below 70%. However, pay was up sharply – largely due to a stock award valued at nearly $25 million dollars.

Pay for the CEO of Freeport McMoran nearly doubled despite the fact that less than 60% of shareholders had supported it the prior year. The company had made changes to director compensation, amended its by-laws to adopt proxy access and adopted a new structure for performance share units. The company notes that target value of PSUs doesn’t match that disclosed in the summary compensation due to accounting rules, and if ultimately true that may account for some of the variation. However, in addition, the company awarded a non-performance based bonus of $1 million as well as NEIC of $1.385 million.

Compensation for Pentair’s CEO increased by 51% even though less than 72% of shareholders had approved the vote the prior year. In the proxy statement the company wrote, “In April 2016, one proxy advisory firm recommended that shareholders vote against approving compensation . . . .As a result of this disappointing recommendation we reached out to shareholders to gain additional insight and to provide them with clarifying information enabling them to make an informed decision on the say on pay vote.” Note here the implication of the phrases “as a result of this disappointing recommendation.” It suggests one of the clear benefits of say on pay (increased outreach) as well as who companies incorrectly blame for low votes (proxy advisors).

TDC for Chipotle’s CEO increased 13% from the prior year despite the fact that it had made a number of positive changes to its compensation practices in the past few years following shareholder engagement. In discussing the vote Chipotle noted that, “We believe [vote] result was primarily due to our disappointing business and stock price performance, but members of the committee also continued to engage with shareholders to understand what drove the vote result.” It is true that the impact of changes to long term incentives may require a few years to be seen in the summary compensation table.

Several of the companies blamed low votes on one-time awards. FMC noted in its proxy statement that “The Committee now recognizes that rationale [for a one-time equity award] and decision-making process were not fully articulated in our 2016 CD&A.” Despite the low vote, changes did not substantially effect Total Disclosed Compensation (TDC). The CEO’s TDC declined from $11 million to $10 million, but remained nearly double what it had been in in 2014.

Cliff’s Natural Cliff’s Natural Resources learned through engagement that, “Large, one-time retention grants are not preferred.” One wonders how board members were unaware of that straight forward truism.

Schlumberger also learned a lesson that should have been self-evident, “Many stockholders we engaged with disapproved of the Compensation Committee’s exercise of discretion when it awarded our executives 100% payout under the performance stock unit (“PSU”) awards that vested in 2016, when the actual performance results called for an 81% payout.”

Another interesting contrast I found as I read through these statements was the language companies used in describing interpretation of support. CVS’s pay vote, for example, received support from approximately 80% of votes cast. The company wrote, “This was lower than the support received in 2015 (94% in favor). During the fall of 2016, we contacted our 50 largest stockholders, holders of more than 50% of our common stock, to get their views.”

On the other hand AON considered the support “approximately 80% of shareholder votes cast” sufficient. “Accordingly,” they note in their proxy statement after disclosing the vote, “the Compensation Committee made no changes to our executive compensation programs as a result of such vote.”