Low pay votes lead to real pay changes

Voting on executive compensation is an important and powerful fiduciary duty for pension and mutual funds. Our annual report on The 100 Most Overpaid CEOs has shown that some funds simply rubberstamp pay packages, but those who take voting responsibility seriously make a real difference. Engagement has increased dramatically since advisory votes were required in 2011. In proxy statement after proxy statement this spring I read about outreach to shareholders. Again and again I saw two-column charts: “What we heard” “How we responded.” When season died down I looked at dozens of proxies. Some of those responses were rather paltry – more on those in an upcoming blog – but many were of substance. In my last post I wrote about companies where CEO compensation fell by 20% or more in one year. Today I’m looking at actions taken in response to low levels of support.

First, an overview. Of the companies I looked at 45 made changes to their performance share programs, either expanding them or adjusting them in some way. The trend away from options and time based restricted shares continues.  Twenty-two companies set caps and/or reduced the maximum and target of future bonus awards. This means that there should be fewer astonishing upside surprises. The removal or decrease of discretion was a theme that shareholders raised and companies responded to as well. I tracked at least 13 companies that explicitly lowered the ability to use discretion in granting awards.

Here are some other examples of large companies that made significant changes.

Exelon took a number of strong actions following its failed say on pay vote last year. It eliminated a discretionary “individual performance modifier.”  Exelon made significant changes to its metrics: eliminating overlap of metrics in various plans and responding to shareholder opinion on which metrics were more appropriate in annual vs. long-term pay. The company also moved PShare performance periods from annual to 3-year through a phased-in process.

Goldman Sachs had a Long Term Incentive Plan (LTIP) with payouts that tended to surprise on the upside. Most recently, former President Gary Cohn received a cash payment of nearly $47 million for prior LTIP awards when he left Goldman Sachs to join the Trump administration. But shareholders had been raising concern on this plan for years before that payout. The company has made some changes; beginning in 2014 they agreed to eliminate compensation committee discretion to adjust final payouts of new LTIP awards. In 2016, ISS & Glass Lewis both recommended against the pay package and approximately one third of votes were cast against it. Finally this year, after continued discussion with shareholders, Goldman discontinued its LTIP forward-looking cash awards.

Borg Warner was one of those rare companies (a few more in next blog) where CEO accepted actual cuts. Specifically, “The Committee and the CEO agreed to reduce his earned 2016 annual incentive plan award by $2.43 million (71%) from $3.38 million to $0.95.” The company also changed its benchmarking practices for target awards from the 65th to the 50th percentile.

BB&T was another company that made significant changes, including one retroactive one. In June 2016, the company “retroactively added Total Shareholder Return (“TSR”) as a payment modifier that can decrease payments under the previously granted 2016-2018 LTIP awards based on BB&T’s TSR performance relative to its peer group.” The company eliminated stock options and increased its reliance on PSUs. In addition the company increased its stock ownership guidelines for its CEO and strengthened its clawback policy.

Expeditors International was one of many companies that moved to performance share units to increase alignment. In 2016, 76% of the CEO’s pay was delivered in cash; the company estimates that in 2017 the cash percentage will fall to 60%.

Verifone also received shareholder feedback regarding excessive discretion in its pay plans. Following a failed say on pay vote the company “eliminated the potential for subjective upwards discretion in the form of qualitative adjustments of up to 20% that previously could increase short-term incentive payouts” beginning in 2016.  “Beginning in fiscal 2017, we have replaced the individual performance portion of the short-term incentive plans with objective, quantitative corporate strategic goals that will be established at the beginning of each fiscal year.” The company also placed a cap on maximum payout of both short term and long term compensation components.

Bed, Bath & Beyond received support of only 22% of shareholders at its July 2016 vote and has made changes that brought compensation down each of the last two years, though they were not enough to satisfy shareholders. Changes made in 2016 included the adoption of two-year post-vesting holding period for the CEO of shares acquired on vesting of 2017 PSUs. This results in a reduction in the value of CEO equity compensation as reported on the summary compensation table of approximately $1.35 million. The company has reduced compensation targets, reduced director compensation and made adjustments to its performance share units. For all the changes, however, the CEO continues to receive an exceptionally large salary of almost $4 million dollars.