These firms issue recommendations to investors on how to vote their proxies. RiskMetrics Group, the largest and most influential of the bunch, has broadened its list of what it considers poor pay practices, resulting in greater examination of companies’ pay plans and the re-election of directors who approved those plans.
One of the factors the firm uses in deciding whether to recommend shareholders vote against compensation for directors is the pay practices test, says Jim Kroll, a senior consultant at the compensation consultancy firm Towers Perrin.
This year, RiskMetrics has expanded its list of poor pay practices to include excessive severance and change-in-control arrangements, tax gross-ups on executive perks, and excessive auto allowances or private use of corporate aircraft.
The result has been more recommendations to vote against re-election of directors. RiskMetrics has recommended against the re-election of 20 per cent of the directors in the universe of companies it covers this proxy season – the highest since 2003, following the Enron scandal.
The company has also recommended investors vote against 28 per cent of equity pay plans up for a shareholder vote this year. That is lower than the previous four-year average of 33.3 per cent partly because many companies have amended their pay practices to be more shareholder-friendly following congressional and regulatory scrutiny, RiskMetrics says.
Pay plans are also becoming more shareholder-friendly, as companies make changes in response to issues flagged by the proxy advisory firm before the plans are put to a stockholder vote. After discussions with RiskMetrics, Borders made changes to its long-term incentive plan. Among the changes, Borders reduced the number of shares available for grant under the plan by 1.65m.
RiskMetrics also approached Jack in the Box, after issuing a proxy statement in February, about the company’s intent to make tax gross-up payments for executives and relocation payments for its senior vice-president, general counsel and secretary, Phillip Rudolph.
In response, Jack in the Box decided to eliminate tax gross-ups on executives’ perquisites, except for standard relocation benefits and spousal travel for certain company-sponsored events.
In April after talking to RiskMetrics, Furniture Brands International said it would put its stockholder rights plan that the board approved last year to the vote at its 2010 annual meeting. RiskMetrics has a policy of recommending a vote against directors who approve or renew a stockholder rights plan without seeking shareholder approval.
Many companies are willing to amend their pay policies in response to RiskMetrics because so many institutional investors rely on the firm’s recommendations. That reliance is expected to strengthen, as more companies adopt “say on pay” policies.
The measure is mandated by the US government for companies that borrow funds under the Troubled Asset Relief Program. About a dozen other companies in the past two years have voluntarily adopted say on pay, which allows shareholders to cast nonbinding votes against, or in support of, the compensation arrangements for the top five named executive officers.
A bill introduced in the Senate in May by Charles Schumer, a New York democrat, would mandate say on pay for all public companies. A similar bill passed the House in 2007.
“[Under say on pay,] there will be a rise in the power of the voting services and that’s the product of the underlining investors not doing their homework enough,” says Edward Durkin, director of corporate affairs at the United Brotherhood of Carpenters and Joiners.
The union has been opposed to say on pay because it would not add much value to the discussion over compensation issues, Mr Durkin says. It would also be impossible for most institutional investors to vote on hundreds or thousands of compensation plans (3,500 in the carpenters union’s case), unless they were basing it on third-party advice from proxy advisory firms. “If you have an annual say on pay vote and you exercise your voting responsibility as we do … it’d be overwhelming,” Mr Durkin says.
Instead, this year the Carpenters union has submitted an alternative proposal to say on pay at 20 large companies. It would allow investors to cast a non-binding vote every three years on overall compensation, along with the annual incentive plan, long-term incentives, and post-employment benefits such as pension and severance.
Durkin attributes the rise in influence of RiskMetrics and other proxy advisories to institutional investors not doing their job. If investors and companies do not want a third party to mediate, they need to communicate directly with one another, Mr Durkin and other observers say. The ability to do this depends on how good companies’ relationship with its investors is.
Tarp companies have shown that while reaching out to shareholders can be daunting, it is not impossible.
After firms were notified by the White House this year they would be implementing say on pay for their 2009 annual meetings, no Tarp companies so far have received a majority of votes against their executives’ compensation packages. “I assume they picked up the phone [and called shareholders] right after they found” they had to implement say on pay, Mr Kroll says.