For the 2012 proxy season, we’ve seen a new Pay-for-Performance (P4P) analysis introduced by ISS (Institutional Shareholder Services). As we expected, companies are willing to come out swinging against the ISS negative say-on-pay (SOP) vote recommendations as a result of its new P4P analysis. So far, the following companies have filed additional proxy materials to counteract such negative vote recommendations from ISS:
- The Walt Disney Company, filed March 1, 2012: http://www.sec.gov/Archives/edgar/data/1001039/000119312512091621/d310012ddefa14a.htm
- National Fuel Gas Company, filed February 24, 2012: http://www.sec.gov/Archives/edgar/data/70145/000119312512077357/d304333ddefa14a.htm
- supplemental information filed February 27, 2012: http://www.sec.gov/Archives/edgar/data/70145/000119312512080925/d307002ddefa14a.htm
- International Game Technology, filed February 24, 2012: http://www.sec.gov/Archives/edgar/data/353944/000120677412000804/igt_defa14a.htm
- Parametric Technology Corporation, filed February 23, 2012: http://www.sec.gov/Archives/edgar/data/857005/000085700512000006/defa14a.htm
- Piedmont Natural Gas Company, Inc., filed February 22, 2012: http://www.sec.gov/Archives/edgar/data/78460/000110465912011677/a12-5638_1defa14a.htm
- Qualcomm Incorporated, filed February 21, 2012: http://www.sec.gov/Archives/edgar/data/804328/000119312512068644/d304063ddefa14a.htm
- Actuant Corporation, filed December 29, 2011: http://www.sec.gov/Archives/edgar/data/6955/000119312511354823/d273993ddefa14a.htm
In several cases, these supplemental materials addressed more than just the SOP vote recommendation from ISS. The summaries below capture the main points raised against the negative SOP vote recommendation issues by ISS.
The Walt Disney Company
DIS found that “ISS has again substituted its opinion for the studied analysis and judgment of the Board as to the compensation that was appropriate to secure Mr. Iger’s services for the Company through mid-2016.” DIS attacks the peer group selected by ISS as well as the return on DIS stock during the tenure of its CEO compared to that of the S&P 500 index and four media company peers. DIS indicates that its CEO’s pay was completely in line with the compensation paid to the CEOs of its five media peers. DIS also emphasized that no up-front grants were given to the CEO to extend his tenure as CEO and that 90% of the potential value of his compensation package is in the form of performance-based bonus, performance-based RSUs and options.
National Fuel Gas Company
NFG filed a letter it sent to ISS in the first filing indicating the flaws in the application of ISS’s P4P methodology. NFG indicates that only 3 of its 13 ISS-identified peers had 2011 CEO compensation available, so the rankings used were therefore flawed. NFG also called into question ISS’s use of GICS group to establish the peer group, indicating that its shareholder do not invest in it only because of its utility business, but instead because of its E&P business segment. NFG states that a peer group comprised of both gas distribution and oil and gas exploration and production companies would have been more correct. NFG then includes charts illustrating 1- and 3-year TSR returns for the groups it mentioned. Finally, NFG indicates that 2011 was anomalous.
In its secondary filing, NFG strove to demonstrate that its CEO’s pay was aligned with a proper peer group. It included total direct CEO compensation for a peer group and then showed the TSR for those peers. Finally, in support of its statement that its CEO’s compensation was in alignment with the interests of shareholders, it included a bulleted list of points.
International Game Technology
IGT lays out its case for why shareholders should vote in support of its SOP vote. IGT cites that both Glass Lewis and Egan Jones have recommended “for” IGT’s SOP vote. IGT then details its performance during 2011 and how it performed against the ISS peers. Finally, IGT details how its approach to executive compensation emphasizes performance.
Parametric Technology Corporation
PMTC filed talking points for telephone calls made to select stockholders regarding its SOP vote and ISS’s negative vote recommendation. PMTC indicated that its new CEO has delivered outstanding results, that his compensation is heavily weighted toward performance-based compensation and closely aligned pay with performance, attacks the ISS notion that its one-time performance-based equity grant constituted compensation for 2011 (indicating that it has to be earned through November 2013), that the performance metrics selected for the special equity award are challenging, and that it has been responsive to shareholder concerns about compensation.
Piedmont Natural Gas Company, Inc.
PNY also filed what appears to be talking points used in reaching out to select shareholders to discuss the ISS SOP vote recommendation. Among other things, PNY indicated that ISS overweighed one 3-year performance measure, ISS used companies that are not comparable to PNY as peers, and that ISS’s criticism of the non-performance-based equity as retention awards overlooked the importance placed on equity awards by the Compensation Committee as being critical to the Company’s overall compensation philosophy, ISS did not identify any other issues with PNY’s compensation program, and that Glass Lewis issued a positive SOP vote recommendation.
QCOM filed a letter that was sent to shareholders regarding its SOP vote which explained why the shareholders should ignore the negative ISS vote recommendation and instead vote in favor of QCOM’s SOP vote. QCOM attacked the methodology used by ISS in compiling the peer group used, especially since the ISS methodology failed to take into account that QCOM is one of the largest companies in the U.S. by market capitalization. QCOM then includes more detailed information regarding its size under market capitalization, net income, net income margin and revenues against the S&P 500 Index, the peer group utilized by QCOM and the one selected by ISS to emphasize the fact that it was clearly at the top of the ISS peer group in terms of size. QCOM then details how it performed in 2011, how it had been sensitive to ISS’s guidelines and compensation best practices, and illustrates how it makes extensive use of performance-based compensation. Finally, QCOM details the compensation best practices that it has implemented. QCOM then included estimated results of ISS’ CEO P4P tests under its FY11 peer group and more detailed size comparison information.
ATU filed supplemental information on its SOP vote as a result of both ISS and Glass Lewis recommending against it. ATU discussed performance in 2011, and discusses why the Company and Board feel the Company has an executive compensation program that is well-aligned with both shareholders’ interests and its financial results. ATU cites a study by its compensation consultant as refuting the findings by ISS and Glass Lewis. The study looked at the relationship between pay opportunity and realized pay of the CEO compared to ATU’s peer group. ATU then described its robust insider ownership policies, holdings and procedures. ATU indicates that both ISS and Glass Lewis misstated ATU’s CEO’s total compensation, stemming largely from the value ISS and Glass Lewis attached to stock options. ATU indicates that neither ISS’s nor Glass Lewis’s analysis acknowledged that the equity awards granted in 2011 actually had declined in value (quite substantially) (by about 71%). ATU states that its NEOs did not receive salary increases during 2009, 2010 or 2011, and the NEOs actually took a voluntary 10% reduction in salary for over a year during that time period. ATU then highlights why its executive pay program embodies P4P.
Even though ATU laid out its case for why its pay program is performance-based, a majority of ATU’s shareholders did not support ATU’s SOP vote — 46.4% For, 53.0% Against and 0.6% Abstain. (Form 8-K, filed January 17, 2012, http://www.sec.gov/Archives/edgar/data/6955/000119312512013766/d281677d8k.htm). ATU’s is the first failed SOP vote for 2012.