IN THE AFTERMATH of the first year of mandatory say on pay, investors and companies are asking themselves whether or not say on pay is really making a difference. They are also asking whether there are more changes to come or whether we've reached a steady state. After all, only about 2% of companies received a majority "no" vote in 2011.
So, does this mean that, except for a few outliers, all is good in the land of executive compensation?
My take is that say on pay is just the current manifestation of a trend toward greater conservatism, a long march that is rooted in a lower-growth economy. The recession of 2001, coupled with spectacular corporate failures, brought in the first wave of reforms in corporate governance. And if one recession didn't provide enough of a lesson, the recession of 2008 and 2009, coupled with the advent of Dodd-Frank, reinforced our learning with a re-doubled focus on executive compensation.
Given the changes over the past decade, we have now seen the prevalence of pay practices reach a tipping point. Executive pay practices that are considered to be good for executives but not necessarily for shareholders, such as CEO contracts, gross-ups, single triggers, above market pay for average performance, lucrative supplemental pension plans, and equity mega-grants, have all gone from majority to minority practice. Conversely, executive pay practices that are considered to be good for shareholders, but tend to restrict executives, like average pay for average performance, clawbacks, and ownership guidelines, have transitioned from minority to majority practice. Further, these transitions are explicitly (and sometimes exhaustively) described in the company's proxy report to shareholders. Dodd-Frank seems to have quickened the pace of changes that were already afoot.
While we are past the tipping point, the work of the compensation committee never seems done, and we predict more changes ahead.
First of all, the trends mentioned above are continuing, particularly as old contracts and plan provisions roll off and new ones come in. Secondly, investors caution that companies should not become complacent and misinterpret the 2% majority "no" vote. In their view, companies that received a less than 80% approval rating still have more work to do. Even if many of the so-called egregious practices have been teased out of a company's executive pay system, investors report that they will be taking...