Towers Watson found that almost one out of three companies (32%) with high CEO pay opportunities (in the top quartile) received low say-on-pay shareholder support (below 70%) in last year's proxy season, compared to only one out of five companies (19%) with CEO pay opportunity at or near the median (see figure below). Similarly, companies that performed poorly (bottom one-third in total shareholder return [TSR]) were more than three times as likely (34%) to receive less than 70% shareholder support for say on pay, regardless of their pay levels, than were companies with top levels of TSR (10%). The findings are based on a Towers Watson review of pay data of 728 companies from publicly available proxy filings from 2008-2010 and a review of shareholder voting results in 2011.
"While say-on-pay votes primarily reflect absolute levels of pay for companies with high pay levels, they can become say-on-performance votes when companies do poorly in generating shareholder returns," said Todd Lippincott, leader of Towers Watson's executive compensation consulting business for the Americas. "The strong connection among say-on-pay outcomes, executive pay opportunities and shareholder returns indicates that other efforts like eliminating certain pay practices, such as change-in-control tax gross-ups, may have a limited impact on say-on-pay voting results. Based on our research, it appears that companies that target high pay opportunities run a much greater risk of unacceptable voting outcomes than companies that target median pay levels."
The study found companies with high CEO pay opportunities in 2008 and 2009 received similar levels of shareholder support, regardless of whether they changed pay levels for 2010. Slightly more than three-quarters (78%) of companies that lowered pay for 2010 received acceptable shareholder support levels (more than 70%), compared to just less than three-fourths (74%) of those that kept pay at high levels. However, companies with median pay levels for 2008 and 2009 that increased their CEO pay opportunities to high levels during 2010 saw reduced shareholder support for their say-on-pay votes, with just less than two-thirds of those having done so receiving acceptable shareholder support.
"It will be interesting to see how say-on-pay voting plays out in the 2012 proxy season, given that many companies had strong operating results last year, while their share prices and shareholder returns were flat," said Lippincott. "Clearly, our research confirms that shareholder votes are strongly influenced both by the sheer size of the pay opportunity and the sensitivity of pay to performance, which many investors equate with shareholder returns."