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CFO Corner: Say on Pay Campaigning and the 97% Rule

Dan Walter, Performensation

It’s proxy season and Say on Pay is once again on the minds of anyone involved in executive compensation. As of this past week, about 170 companies have reported their results and less than 2% have failed. When we are at the end of this season, it looks like it will be somewhere south of 3% failures, about where we were the past two years. Let’s start with the positive, what I like to call the 97% rule. 97 out of every 100 companies have executive compensation practices that meet or exceed the desires of their shareholders.

The 97% are a lot like incumbent politicians. Inertia and familiarity gets you a long way in this process. If you can avoid a negative media moment or an inexcusable governance gaffe, you are likely to win your Say on Pay election.
I refer to “meets or exceeds” because those companies with less than 70-75% positive votes are probably closer to the edge than it seems. To be safe in the world of Say on Pay, you need to have better results than the US Senate does to pass important legislation. Equilar recently published, “2013 Say on Pay Warning Signs Report, that discusses some of the predictors for failure.

Not surprisingly one of the key factors identified was a misalignment between Total Shareholder Return (TSR) and CEO compensation. In many cases, this apparent failure to pay for performance was exacerbated when comparisons were made to peer companies. “58 of 70 companies that failed (in 2011) ranked below the median compared to their peers for 1-year TSR.” Failure should come as little surprise to companies if they pay in the upper 50%, while delivering shareholder returns in the bottom 50%.

Other key factors stated in failures were shareholders not understanding disclosures, and investors advisory firms providing negative recommendations. The first of these may be easier to correct than is believed. Communicating pay to shareholders in today’s environment requires a more proactive and interactive approach. Like any type of voting process, it is best to get in front of your constituency long before the election to both communicate and hone your message. Simply putting your compensation on the ballot with an explanatory disclosure will work only if you are certain you are going to win.

As it turns out, dealing with the advisory firms may be just as simple for some companies. If you have run your compensation campaign with skill, most of your shareholders will already understand your position. As long as the underlying data is not too far off target (or as long as there is an acceptable reason) you should be fine. If you are one of the unlucky few broadsided by unfortunate news or results, you will likely need to jump into a more intense pre-vote outreach effort to explain how your compensation program will work better, or be redesigned for the future. As pay programs become more complex it is increasingly unlikely that any amount of disclosure will provide the level of understanding or buy-in you will want or need.

Say on Pay is a big concern for companies, but mainly because so many have done so little to provide real communication and evidence to support their pay practices. We will continue to see compensation design move to a more performance-based model as the impact of Say on Pay resonates down through organizations. However, it is unlikely we will see any monumental change in Say on Pay failures or executive compensation pay levels in the near-term future.

Dan Walter is the President and CEO of Performensation an independent compensation consultant focused on the needs of small and mid-sized public and private companies. Dan’s unique perspective and expertise includes equity compensation, executive compensation, performance-based pay and talent management issues. Dan is a co-author of “The Decision Makers Guide to Equity Compensation”, “If I’d Only Know That”, “GEOnomics 2011” and “Equity Alternatives.” Dan is on the board of the National Center for Employee Ownership, a partner in the ShareComp virtual conferences and the founder of Equity Compensation Experts, a free networking group. Dan is frequently requested as a dynamic and humorous speaker covering compensation and motivation topics. Connect with him on LinkedIn or follow him on Twitter at @Performensation and @SayOnPay.

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