Beyond the proxy ... and proxy advisors: shareholder engagement strategies for a favorable say on pay vote.

AuthorGoldstein, Andrew
PositionSHAREHOLDER ENGAGEMENT

WITH MANY COMPANIES delivering lackluster shareholder returns in 2011, say on pay votes in the 2012 proxy season may take on a decidedly different cast than the overwhelmingly favorable outcomes of last year's votes. To help boards and compensation committees navigate the 2012 say on pay environment, we consulted with several leading institutional investors to gauge their top "hot button'1 issues and better understand the kind of dialogue they want to have with their portfolio companies. Their observations offer a preview of what investors are on the lookout for in deciding how they will cast their 2012 say on pay votes.

Just as most compensation committees follow a carefully structured process to review and make decisions about executive pay, the starting point for most institutional investors is a thoughtful process grounded in their own research. Of course, voting decisions on say on pay can also be informed by resources such as the Compensation Discussion and Analysis (CD&A) section of the proxy statement and proxy advisor reports.

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Our discussions with institutional investors were telling. Not only were several key themes very consistent from organization to organization, but we believe some of the points raised by investors could well be blind spots for companies and boards. Boards will be well served to consider these issues when seeking support for say on pay votes this year.

Put a premium on pay for performance

It would be easy to view pay for performance as almost a fait accompli, given the close attention already paid to this issue. Apparent pay for performance disconnects were the most common trigger for negative say on pay votes in 2011, and the topic remains the cornerstone of proxy advisor scrutiny in 2012. Investors signal that pay for performance remains a top concern for them--if not the concern--this year and beyond. And, given that recent Towers Watson research points to the potential for misalignment between 2011 shareholder returns and executive incentive payouts for 2011 financial performance, investors are likely to be even more sensitive to this issue in 2012.

Translating that concern into how investors intend to monitor pay for performance in 2012 is where things get interesting. We found it noteworthy that several institutional investors expressed interest in considering alternative approaches to analyzing pay for performance beyond those required by the SEC and embraced by proxy advisors...

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