Safety Insurance Group is first company to fail Say on Pay after receiving an ISS ‘For’ recommendation

Safety Insurance Group received 42% support for Say on Pay after receiving 67% in 2011. We believe this is the first company to fail Say on Pay despite receiving a For recommendation from ISS. Possible reasons for the low 2012 vote include: no specific description of the shareholder outreach process or findings following a relatively low vote in 2011, no meaningful change to pay program to address the 2011 vote or shareholder feedback, and negative TSR in 2011 driven in part by larger than usual underwriting losses due to extreme weather events during the year. (source: Semler Brossy analysis, ISS Governance Analytics). Another likely contributing factor to the failed vote is that the percentage of performance-based pay is low. The company’s pay program is relatively simple: salary, bonus based on EBIT, and time-vested restricted stock grants. The target annual bonus, the only portion considered performance-based, is 24% of the CEO’s target total direct compensation. Interestingly, the company did not pay a bonus in 2011 but that did not appear to carry much weight with shareholders. ISS likely supported the program because the company scored a Low concern on all three of the quantitative tests, despite their policy of applying additional scrutiny to companies that were under 70% last year. ISS noted a Medium for the company on the CIC/Severance Arrangements and Committee Responsiveness and a Low concern on the other categories (Pay for Performance, Non-Performance-Based Pay Elements, Peer Group) as well as delivered For recommendations on the directors up for election. Apparently shareholders did not follow ISS’ recommendations for director votes. In 2012, director support was approximately 60%. Both directors up for election in 2012 are on the Compensation Committee. In 2011, the two directors up for election received support above 96%, although neither were on the Compensation Committee.