Changes Due to 2011 Say on
Pay Voting Results
A Look at Early Responses
Introduction
In January 2011, the SEC issued the final
rule for amendments to Item 402(b) of Regulation S-K. The rule requires
public companies to address in their CD&A if the results of their most
recent Say on Pay advisory vote factored into their compensation policies,
and if so, how.
Equilar analyzed early responses to 2011
Say on Pay voting results found in the proxies filed so far in 2012. This
article will provide an overview of the responses, and highlight changes
that companies are making to more closely link executive compensation to
financial performance. While there is no one-size-fits-all to compensation
practices, these examples illustrate some of the most common approaches.
Voting Analytics
For this analysis, we studied proxies filed
between January 1, 2012 and March 1, 2012. We found 31 proxies filed by
companies that passed their 2011 Say on Pay vote, and discussed those
voting results in the proxy. Twenty-eight (28) companies stated that no
significant changes were made as a result of the vote, since they received
overwhelming majority approval. Three (3) companies indicated they
conducted shareholder outreach and/or made changes due to a close vote in
approving Say on Pay.
In addition we searched for mentions of
compensation program changes made by companies whose Say on Pay vote did
not pass. While most of the changes are typically required disclosure in
proxies, some companies were eager to begin to address their voting
results and filed 8-Ks that disclosed actions taken toward achieving
future shareholder approval, several months prior to their 2012 proxy
statement.
Of the 38 Russell 3000 companies whose
shareholders did not approve their 2011 Say on Pay vote, 10 stated that
they had taken some action to address shareholder concerns. These actions
included engaging a new independent executive compensation consultant,
holding discussions with institutional investors, or directly adopting
changes. The remaining 28 had not filed their 2012 proxy by this study's
cut-off date, and have yet to issue a response to their failed Say on Pay
vote.
The chart below categorizes the changes
made by the 10 companies that failed to pass their Say on Pay vote. Most
companies made more than one change to their pay policies as a result of
the failed vote. Each of the categories can include additions,
modifications, and eliminations involving each category.
Disclosure Examples
Below are some examples of disclosure
provided during the last three months relating to 2011's Say on Pay votes.
These examples include responses to passing votes, and the different
approaches companies took to address a failure to pass 2011's Say on Pay
vote.
Disclosure Examples:
Response to Passed 2011 Say on Pay
Disclosed responses to 2011's votes are not
just concentrated among those companies where approval failed. Companies
whose shareholders approved the 2011 Say on Pay vote included a section in
their CD&A dedicated to their response to Say on Pay votes. Some companies
simply included a short paragraph citing overwhelming approval rates and a
lack of change as a result of the vote. Other companies, particularly
those with relatively low rates of approval, conducted shareholder
outreach programs and instituted changes in an effort to raise approval
levels. Below is an example of each type of response.
- Toll Brothers, Inc. (TOL)
DEF 14A filed on February 3, 2012
"The Compensation Committee considered the
results of the 2011 advisory, non-binding 'say-on-pay' proposal in
connection with the discharge of its responsibilities. Because 99% of
our shareholders voting on the 'say on pay' proposal approved the
compensation of our NEOs described in our proxy statement in 2011, the
Compensation Committee did not implement significant changes to our
executive compensation program as a result of the shareholder advisory
vote."
- NRG Energy, Inc. (NRG)
PRE 14A filed on February 29, 2012
"At last year's Annual Meeting of
Stockholders, the first advisory vote on executive compensation was
held. The vote was approved, on an advisory basis, with approximately
60% voting in favor of the proposal. Following the Annual Meeting, and
through July 2011, the Company's Investor Relations group, supported by
members of the Human Resources group, conducted an extensive outreach
program to discuss the Company's compensation practices with NRG's
largest stockholders to determine the following:
- why
certain stockholders voted for or against the Company's compensation
practices;
- what
were the positive elements of the compensation design; and
- what
new or different elements the stockholders would recommend regarding
the Company's executive compensation program.
Through this process, it was clear that
the focus of stockholders is threefold: (i) on the continual growth of
Free Cash Flow and EBITDA; (ii) better aligning pay with performance,
particularly as it relates to the Company's return of capital to
stockholders; and (iii) increasing the performance-based metric in the
Company's LTIP.
Following this extensive outreach,
management presented the results of these discussions to the Committee
in July 2011, at which point the Committee, in consultation with
Frederic W. Cook, evaluated potential adjustments to the Company's
executive compensation design. At this meeting, management and the
Committee came to an agreement as to the direction of the changes to the
Company's compensation practices, which were then presented in more
detail to the Committee in October 2011. Following the October meeting,
management made a final assessment of the changes to ensure that they
aligned with the feedback received from the Company's stockholders and
presented a revised the AIP design and modified the LTIP awards to the
Committee for final approval in November 2011."
Disclosure Examples:
Responses to Failed 2011 Say on Pay
Of the companies that failed their 2011 Say
on Pay vote, responses range from detailed explanations of changes they
made in several compensation areas, to a few paragraphs from companies
confident that their failed vote was a result of one particular plan
provision. Most commonly, companies chose to modify their long-term and
annual incentive plans. Other changes include the adoption of clawback
policies and ownership guidelines, and the elimination of tax gross-ups.
Notably, Shuffle Master attributed their failure to a negative proxy
advisor recommendation and contended that their future Say on Pay vote
would be ameliorated by a single change that caters to the firm.
Disclosure examples of these changes are provided below.
- Beazer Homes USA, Inc. (BZH)
DEF 14A filed on December 22, 2011
"At the stockholders meeting held on
February 2, 2011, 54% of stockholders voting on our 'Say on Pay'
proposal voted against the executive compensation for our NEOs set forth
in our 2011 proxy statement. In response, our Board of Directors and the
Committee completed an in-depth review of our pay practices. As part of
this review, management contacted several major stockholders in order to
better understand the reasons behind the votes against the compensation
for our NEOs. Following this assessment process, our Board of Directors
took the actions described below to change our compensation practices
and programs:
-
Cogent
Communications Group, Inc. (CCOI)
DEF 14A filed on March 2, 2012
"At the Company's annual meeting in 2011
the stockholders did not approve the compensation of the named executive
officers. Based on the views expressed by several stockholders this
occurred because the Board cancelled options and replaced them with
restricted stock for one of the named executive officers. The Board and
Compensation Committee do not intend to do so again. The Board has
amended the 2004 Incentive Plan to prohibit such actions as well as to
prohibit the re-pricing of options that have a strike price below the
current price of the Company's stock ("underwater options") unless such
action is approved the stockholders."
-
Shuffle Master,
Inc. (SHFL)
DEF 14A filed on February 3, 2012
"At the March 17, 2011 Annual Meeting of
Shareholders, the shareholders of the Company voted, on an advisory
basis, against approval of the named executive officer compensation
disclosed in our proxy statement dated as of February 4, 2011. The
Company believes that the negative shareholder vote was a result of the
issuance on February 17, 2011 of the ISS Proxy Advisory Services report
(the "Report"), which contained a recommendation against such advisory
vote based solely on the inclusion of the "modified single trigger"
provision in the employment agreement of Mr. David B. Lopez, the
Company's Executive Vice President and Chief Operating Officer, in
effect at such time.
On May 24, 2011, the Company amended Mr.
Lopez's employment agreement, with the primary change being the deletion
of the provision that permits the termination of the employment
agreement by Mr. Lopez and the receipt of certain benefits upon a
"change of control" of the Company. Under the amended and restated
employment agreement, Mr. Lopez may only terminate his employment
agreement "for good reason" in the event of a change of control if there
is also a material reduction in the nature or scope of his duties,
responsibilities, authority, or position, including, but not limited to,
removal or expulsion from the Board of Directors without Cause, as such
term is defined within such agreement. These changes removed the
"modified single trigger" mechanism referred to in the Report.
As the Company does not include "single
trigger" or "modified single trigger" change of control provisions in
any executive officer employment agreements, the Company believes that
it has remedied the sole basis for ISS previous recommendation to vote
against the advisory vote."
Disclosure Examples:
Changes to Long-Term Incentive Plans and Annual Incentive Plans
- Hewlett Packard Co. (HPQ)
DEF 14A filed on February 3, 2012
"During fiscal 2011, we conducted a
comprehensive review of our long-term incentive program. Upon completion
of that review, the Committee approved a new structure for long-term
incentive awards granted beginning in fiscal year 2012. Under the new
structure, our senior executives will receive three types of equity
awards:
-
Performance-contingent stock options, which will vest only if the
service requirement is met and HP's stock price appreciates above
specified thresholds within four years from the date of grant (for
fiscal 2012 awards, the thresholds, each applicable to 50% of the
award, will be 20% and 40% appreciation over the exercise price);
-
Performance-based restricted unit awards, which will vest only if cash
flow and revenue growth goals are achieved above a threshold level of
performance; and
-
Time-based restricted stock units, which will vest over a three-year
period rather than a two-year vesting period, as was applicable to
previous awards.
Two of these three types of equity
awards, representing 70% of our executive officers' total long-term
incentive compensation, contain performance conditions, thereby ensuring
that a substantial portion of our executive officers' long-term
incentive compensation is linked to the achievement of financial
performance goals. This places a significant emphasis on the achievement
of financial performance goals and stock price performance and provides
a strong linkage between pay and performance. The remaining 30% of our
executive officers' long-term incentive compensation is awarded in the
form of time-based restricted stock units and is intended to promote
retention."
-
Helix Energy
Solutions Group, Inc. (HLX)
8-K Exhibit 99.1 filed on January 30, 2012
"We welcome the opportunity to engage our
shareholders regarding topical matters and would like to update you
regarding actions the Compensation Committee has taken with regard to
executive compensation following the annual shareholders meeting held on
May 11, 2011. The following is a summary of those actions, which are
designed to more closely link executive compensation with the financial
performance of the Company.
- Design
of 2011 short-term incentive bonus program: Subsequently, in June
2011, The Compensation Committee determined the metrics for the 2011
short-term cash incentive bonus. For the Company's Chief Executive
Officer, Chief Financial Officer, General Counsel and Chief Accounting
Officer, the performance metrics consist of the following: (i) 40%
based on the achievement by the Company of certain EBITDAX (earnings
before interest, taxes, depreciation, amortization and exploration
expense) targets; (ii) 40% based on total shareholder return (TSR) of
the Company's stock for 2011 relative to that of the compensation peer
group previously selected by the Committee; and (iii) 20% based on
personal objectives. For the Company's Executive Vice President Oil &
Gas and the Executive Vice President-Contracting Services, the
performance metrics consist of the following: (i) 25% based on the
achievement by the Company of certain EBITDAX targets; (ii) 25% based
on the achievement by the officer's respective business unit of
certain EBITDAX targets; (iii) 25% based on Company TSR for 2011
relative to that of its peer group; and (iv) 25% based on personal
objectives. (This information is more particularly described in the
Current Report on Form 8-K that we filed on June 16, 2011.)'
-
Johnson Controls, Inc. (JCI)
DEF 14A filed on January 11, 2012
"Specific changes for fiscal 2012
include:
- A
substantial increase in the level of earnings growth (to 10%) required
to earn incentive awards under both our Annual and Long-Term Incentive
Performance Plans to better align incentives with the growth
expectations of our investors.
- Adding
Return on Sales (ROS) to our Annual Incentive Performance Plan to
focus on margin expansion, which is a key area of focus by our
institutional shareholders."
-
NRG Energy,
Inc. (NRG)
PRE 14A filed on February 29, 2012
"As a result, for 2012, changes have been
made to both the AIP compensation and the LTIP compensation to increase
alignment of executive compensation with stockholder focus. The Company
has retained the financial AIP goal of Consolidated Adjusted Free Cash
Flow and Consolidated Adjusted EBITDA to continue to focus on the
importance of cash flow and long-term growth, while increasing
individual performance metrics as they relate to the Company's Capital
Allocation Plan. This change is designed to bring individual focus to
returning capital to the Company's stockholders. In addition, the grants
under the LTIP will now be 33% RSUs and 67% MSUs. MSUs are restricted
grants where the quantity of shares increases and decreases alongside
TSR. These changes will more closely align pay with performance."
Disclosure Examples:
Adoption of Clawback Policies and Ownership Guidelines
- Pico Holdings, Inc. (PICO)
8-K filed on January 30, 2012
"1. We established stock ownership
guidelines for directors and executive officers. These guidelines are
intended to help ensure that our Board and management maintain an equity
stake in the Company, and by doing so, link their interests with those
of other shareholders. The guidelines require ownership by the CEO of
the lesser of 275,000 shares or stock with a value of three times his
base salary, with smaller ownership requirements for the CFO and other
designated executive officers. The guidelines for directors specify
ownership of the lesser of 5,000 shares or stock with a value of three
times the annual cash retainer for Board service.
2. We adopted a cash incentive
compensation repayment ('clawback') policy. This policy requires our
CEO, CFO and other designated executive officers to repay to us the
amount of any annual cash incentive that he or she received to the
extent that: (1) the amount of such payment was based on the achievement
of certain financial results that were subsequently the subject of the
restatement that incurs within 12 months of such payment; (2) the
executive officer engaged in theft, dishonesty or intentional
falsification of documents or records that resulted in the obligation to
restate our financial results; and (3) a lower cash incentive would have
been paid to the executive officer based on the restated financial
results. We intend to amend our clawback policy to comply with the
additional requirements of the Dodd-Frank Act after the SEC adopts new
regulations implementing those requirements."
Disclosure Examples:
Elimination of Tax Gross-Ups
- BioMed Realty Trust, Inc. (BMR)
8-K filed on January 31, 2012
"On January 25, 2012, the Compensation
Committee of the Board of Directors of BioMed Realty Trust, Inc. (the
'Company'), as a result of an extensive re-evaluation of the Company's
executive compensation program, adopted a number of significant changes
to the Company's executive compensation program, including: […]
Terminating existing employment agreements, resulting in the elimination
of […] potential excise tax gross-up payments."
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