Regulators surprised Corporate America last month when they said that companies accepting government bailout money must give shareholders an advisory vote on executive compensation as soon as this spring.
Well, the surprise has faded, and the march of say-on-pay votes has begun—even if most companies adding the votes to their proxy statements aren’t quite sure they know what they’re doing.
According to compensation research firm Equilar, 54 companies filed proxies with say-on-pay proposals from Feb. 17 (when the requirement went into effect) through March 9. Most of those companies had little time to prepare and even less guidance to work with, since the mandate was sprung upon them as part of the American Recovery and Reinvestment Act signed into law in February. As a result, most of the early TARP proxies simply include brief statements drawing language straight out of the statute, experts say.
“Most of these companies are small community banks, and this is the first time a lot of them have heard of say-on-pay,” says Susan O’Donnell, head of the banking practice at compensation consulting firm Pearl Meyer & Partners. “A lot of the calls I’ve been getting have been, ‘What’s say-on-pay and what does it mean?’”
The idea of shareholder votes on executive pay isn’t new; shareholders have clamored for them for years. But actual votes are still rare in this country (only six were held last year, all in favor of the companies’ plans), and the companies allowing them have all done so voluntarily. A mandate to allow votes right away is still very much a new phenomenon.
“Nobody knew two months ago that these companies would have to conduct a say-on-pay vote this year,” says Paula Todd, a managing principal at compensation consultancy Towers Perrin. “It’s catching them flat-footed.”
Wild
Most of the early proxies filed include language that closely tracks the Recovery Act provisions. Absent any further guidance on how to craft the proposal, “the safest approach seems to be language crafted out of the statute, rather than free writing,” says Bob Wild, a partner in the law firm Katten Muchin Rosenman, who has reviewed several draft proxies. “It may not be the most artfully worded, but it’s the most defensible.”
Some companies simply included a one-line resolution and statement that their board recommends that shareholders vote in favor of the resolution. Washington Banking Co. used that approach in its March 6 preliminary proxy, which states: “Resolved, that the shareholders approve the compensation of executive officers as described in the Compensation Discussion & Analysis and tabular disclosure regarding Named Executive Officer compensation (together with the accompanying narrative disclosure in this proxy statement.)”
Others went further. Bank of America, for example, included several bullet points highlighting examples of why its board “believes that the company’s current executive compensation program directly links executive compensation to our performance and aligns the interests of our executive officers with those of our stockholders.”
And what should the proxy statements say about how the board will consider the results after shareholders cast their ballots? Opinions seem to be mixed.
SAY-ON-PAY PROPOSALS
Since the adoption of the [Recovery Act] on February 17, 2009, at least 54 companies receiving financial assistance from the Treasury Department have filed say-on-pay proposals in their preliminary and/or definitive proxy statements. Click on the company name to link to proxy statements from this random sampling of 20 firms:
Bridge Capital Holdings (BBNK)
PRE 14A 3/9/2009
Ameriserv Financial, Inc. (ASRV)
PRE 14A 3/9/2009
Washington Banking Co. (WBCO)
PRE 14A 3/6/2009
First United Corp. (FUNC)
PRE 14A 3/6/2009
National Penn Bancshares, Inc. (NPBC)
PRE 14A 3/6/2009
Home Bancshares, Inc. (HOMB)
PRE 14A 3/6/2009
Peoples Bancorp, Inc. (PEBO)
PRE 14A 3/6/2009
Regions Financial Corp. (RF)
DEF 14A 3/6/2009
Berkshire Hills Bancorp, Inc. (BHLB)
PRE 14A 3/6/2009
Citizens First Corp. (CZFC)
PRE 14A 3/6/2009
Northern Trust Corp. (NTRS)
PRE 14A 3/6/2009
Mainsource Financial Group (MSFG)
PRE 14A 3/6/2009
Fulton Financial Corp. (FULT)
PRE 14A 3/6/2009
Vist Financial Corp. (VIST)
PRE 14A 3/6/2009
M&T Bank Corp. (MTB)
DEF 14A 3/6/2009
Monarch Community Bancorp (MCBF)
PRE 14A 3/6/2009
Heritage Financial Corp (HFWA)
DEF 14A 3/6/2009
Integra Bank Corp (IBNK)
PRE 14A 3/6/2009
Suntrust Banks, Inc. (STI)
DEF 14A 3/6/2009
Pacific Capital Bancorp (PCBC)
PRE 14A 3/5/2009
Source
SEC EDGAR Filings.
Bank of America’s proxy notes that the vote “is advisory and is not binding on the Board,” but states that its compensation committee “will take into account the outcome of the vote when considering future executive compensation decisions.” Bridge Capital Holdings’ preliminary proxy says the board and compensation committee “may take the results of the vote into consideration when reviewing compensation practices and decisions but are not required to so.”
Seizing the Opportunity
Bowie
Carol Bowie of RiskMetrics Group’s Governance Institute says she hasn’t yet done a broad analysis of the filings, but from what she’s heard so far, “most companies aren’t really taking the opportunity to be more targeted in getting information from shareholders.”
Risk Metrics, which advises institutional investors about how to vote on various corporate proxy resolutions, considers say-on-pay proposals on a case-by-case basis. Bowie says its standard U.S. policy for say-on-pay proposals will apply for government-bailout recipients’ proposals as well.
“That will continue to be the framework for what we do, but we’re talking about how to deal with the TARP companies,” she says. “We recognize that they’ll be unique in a way, so there may be some additional considerations due to that, but we haven’t finalized anything yet.”
Todd
Todd, meanwhile, says the current environment may be “the worst of circumstances to be testing this concept” in the United States. Shareholders have had advisory votes on executive pay for years in Europe, and that has led to more ongoing consultation between boards and shareholders on executive compensation.
“There, it’s a year-round process. The issuance of proxy is almost after the fact,” she says. U.S. companies participating in the Troubled Asset Relief Program, however, “didn’t have the opportunity to do that kind of consultation. All they can do is put the language from the statute in the proxy and hope.”
Considering that many U.S. shareholders these days are ready to throttle almost any corporation they can, “it will be hard to know what this vote is a vote about, regardless of the wording of the resolution,” Todd says.
O’Donnell agrees. Most small community banks actually have conservative pay practices, she says. “[But] there’s such ire against banks generally, even healthy banks are getting a bad rap. My concern is that they’ll all get tarred with the same view.”
Wild too, says voting outcomes will be hard to judge. “The stimulus provisions have so dramatically changed the compensation landscape for TARP recipients that to some extent, the vote is one of hindsight on pay practices prior to the legislation,” he says.
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