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Towers Watson Survey: Inaugural Say-on-Pay Proxy Season Brings Few Problems for Most Companies, Although Many Plan Changes for 2012

Posted on 02 Aug 11

The first-ever say-on-pay proxy season had relatively little immediate impact on most U.S. public corporations, although the vast majority of companies are either planning or considering making changes to their executive pay-setting process and overall preparations for next year’s proxy season, according to a new survey by Towers Watson, a global professional services company. The survey also found that some companies anticipate the need to step up their efforts to prepare for the next proxy season if they want to improve their voting results.

The survey found that overall, nearly eight in 10 companies (79%) said say-on-pay either had no or only a little to moderate impact on their focus for the 2011 proxy season. And, nearly three in four companies (72%) plan to devote about the same amount of effort next year. However, 71% of companies that received significant opposition to their programs (i.e., less than 80% shareholder support and at least one negative vote recommendation) plan to devote more time and effort next year compared with this year. Sixteen percent of respondents received less than 80% shareholder support.

Additionally, 41% of companies that received at least one proxy advisory firm “against” recommendation also plan to spend more effort next proxy season.

“Most companies are breathing a sigh of relief now that the proxy season is over,” said Doug Friske, global head of Towers Watson’s Executive Compensation consulting practice. “The same, however, can’t be said for many companies that received an ‘against’ recommendation from proxy advisory firms or failed to win the support of at least 80% of the shareholder votes cast on their say-on-pay resolutions. The survey findings, along with our consulting experience, suggest that these companies are taking shareholder views quite seriously and plan to respond in some way.”
The survey identified several actions that companies took to achieve a positive say-on-pay vote — actions that other companies can consider to enhance support next year. In total, 82% took at least one action to successfully achieve a positive say-on-pay vote.

The most common action was reaching out to shareholders directly (56%), followed by communicating with proxy advisors (53%) and hiring a proxy solicitor (40%). About one-third (32%) indicated they made changes to their pay programs.

Changes Planned for 2012

Despite most companies winning overwhelming shareholder support for their executive pay programs, almost all surveyed companies (91%) are planning or considering at least one change in their pay-setting process or preparations for the 2012 proxy season. Under half (44%) plan to perform additional analyses on the link between pay and company performance, while an equal number already made program changes such as modifications to severance provisions, change-in-control arrangements and perquisites. Slightly fewer (41%) plan to devote more attention to preparing the Compensation Discussion and Analysis (CD&A). Only 17% plan to make changes to their core compensation programs (i.e., base pay and incentives).

“We believe companies need to start thinking now in a proactive way about their strategy for next year’s proxy season,” said Todd Manas, a director in Towers Watson’s Executive Compensation practice in New York. “Even companies that won shareholder approval this year can’t assume they’ll receive a similar outcome next year. Confirming that a strong pay-for-performance linkage exists, reaching out to shareholders and improving their overall communication about how their company pays for performance will be critical, especially as advisory firms use their own measures for how executive pay ties to company performance.”

Other findings from the Towers Watson survey include:

  • Most employers (64%) are only moderately concerned about the pending SEC implementation of the Dodd-Frank requirement to show executive pay versus company performance.

  • Only 20% of companies have already provided additional disclosure information in the CD&A describing the alignment between executive pay and key performance metrics, and will continue to do so when the Dodd-Frank requirement becomes mandatory.

  • Most companies (57%) think proxy advisory firms have relatively little influence with regard to pay program design, but over half (55%) view proxy advisors as having an influence on the results of say-on-pay votes.

About the Analysis

The Towers Watson survey was conducted in June 2011 and is based on responses from executive compensation executives and professionals at 179 U.S. public companies, primarily midsize and large organizations.