Say on Pay

Semler Brossy Consulting Group (download required)

We collected results for 278 more companies this week, bringing our total to 818 for the season. We continue to see high support, with 94% of companies passing with over 70% shareholder approval (this is slightly higher than in 2011 and 2012). Year-over-year, we observe that fewer companies are failing Say on Pay (to date, ten companies this year, or 1.2% of the sample; 2.6% of the sample failed in 2012) and receiving ISS 'against' recommendations (to date, 11% of companies; this compares with 14% of companies in 2012). Four new companies failed this week: AXIS Capital Holdings, Comstock Resources, Golden Star Resources, and Stillwater Mining. In our “Vote of the Week,” we discuss Comstock Resources, which received 33% vote support in 2013 after receiving a 35% vote in 2012. Sustained low support may be due to concerns over annual cash bonuses that are determined by 50% financial performance and 50% discretion (we note that the discretionary piece of the annual cash bonus was paid above target, while the formulaic component was paid below target), benchmarking of CEO pay above median against a peer group of larger companies, and above-median CEO pay despite negative TSR on a one-, three-, and five-year basis.

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Effects of Stock Buybacks on Executive Pay

As 2012 saw the S&P 500 spend nearly $408 billion on stock buybacks, investors and compensation advisors have grown concerned with the utilization of performance metrics that focus on per-share results as they can be manipulated through a reduction outstanding shares. The Wall Street Journal notes that stock buybacks, while having the ability to improve a company’s share price, do not necessarily lead to improved operating performance, thereby creating potential misalignment between pay and performance. Others argue that stock buybacks are often beneficial to shareholders as they are generally used to return cash to investors and they can also serve as opportunities for companies to take advantage of an under-valued share price. Some companies have addressed the concerns associated with stock buybacks by adjusting their earnings per share calculations for executive pay purposes while others don't adjust results but take planned share repurchases into consideration when initially establishing goals.

As Companies Step Up Buybacks, Executives Benefit, Too (The Wall Street Journal - subscription required)

Stock Buybacks Boost CEO Pay, Fueling Benchmark Debate (Agenda - subscription required)

NACD Directorship Panel on Board of Director Compensation (Video)

NACD Directorship

This week, Semler Brossy’s Blair Jones participated in an NACD Directorship panel to discuss trends in Board of Director compensation. Jones noted that while director pay levels have stabilized in recent years, there have been noticeable changes in pay structure. Among these changes are the elimination of meeting fees in lieu of larger annual retainers, the increase of equity in total pay mix and the implementation of robust stock ownership guidelines. In similar fashion to the increase in Audit Chair compensation following Sarbanes-Oxley, Compensation Committee Chairs have also seen increases in compensation due to the increased responsibilities associated with the emergence of Say-on-Pay and the Dodd Frank act. Given the recent interest of companies separating the CEO and Chair role, increased attention has also been devoted towards Non-Executive Chair compensation practices. Jones closed her discussion with the recent development of director nominees receiving compensation from hedge funds that nominated them; to some, this practice has the potential to create tension between the board and Management around which agenda is more important, to emphasize focus on short-term performance, and to infringe on a director’s fiduciary responsibilities.

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