On October 18, 2011, Institutional Shareholder Services (ISS) issued its draft 2012 Policies for comment.  These policies are available at:


Comments will be accepted through October 31, 2011.

Here’s a quick summary of the draft Say-on-Pay(SOP)-related policy changes for 2012:

  • Board: Board Response to Management Say-on-Pay Votes (US)—ISS will consider prior SOP proposals that received significant opposition (note: no bright line set) from votes cast when recommending on compensation committee members, taking into account:
    • The level of opposition
    • The company’s ownership structure
    • Disclosure of engagement efforts with major institutional investors regarding compensation issue(s)
    • The company’s response
    • Specific actions taken to address the issue(s) that appear to have caused the significant level of against votes
    • Other recent compensation actions taken by the company, and
    • ISS’s current analysis of the company’s executive compensation and whether any prior issues of concern are recurring or one-time
    • Additional notes:
      • Higher level of scrutiny for companies where SOP received less than 50% support
      • Recurrence of previously identified compensation issues or newly identified compensation concerns, depending on the severity, may result in an AGAINST vote on SOP and the compensation committee members
    • Request for comment:
      • Does a support level of less than 70 percent warrant an explicit response from a company to address concerns – i.e., including actions or an action plan?  If not, what opposition level warrants an explicit response?
      • Should boards be expected to provide an explicit response to a low supported SOP proposal by the year following that vote; or should accountability be based on the results of more than one low SOP vote?
  • Board: Board Response to Management Say-on-Pay Frequency Vote—ISS is proposing a new vote recommendation policy for SOP:
    • Vote WITHHOLD/AGAINST on all incumbent director nominees if board implements an advisory vote on a less frequent basis than the frequency which received a majority of the votes cast at most recent meeting.
    • Vote CASE-BY-CASE if board implements a frequency that is different than the frequency that received a plurality, but not majority, of votes cast at most recent meeting, taking into account:
      • The board’s rationale for doing so,
      • The company’s ownership structure,
      • ISS’s analysis of the company’s executive compensation and whether there are compensation concerns or a history of problematic pay practices,
      • The previous year’s support level on the company’s SOP proposal
      • The difference between the frequency adopted and the frequency supported by shareholders
    • Request for comment:
      • In cases where a company fails to adopt an SOP frequency that received majority support by shareholders, should there be additional considerations given to these companies?
      • In cases where a company implements an option that is less frequent than that which received a plurality, but not a majority, of votes cast (e.g., one year received 43 percent of votes cast, two year received 1 percent, and three year received 39 percent, excluding abstentions), would the proposed factors help your organization analyze such situations? Are there other factors that your organization would recommend?
  • Compensation: Evaluation of Executive Pay (Management Say-on-Pay)—ISS is proposing a new methodology for evaluating pay-for-performance alignment – strong, satisfactory or weak alignment. Methodology would combine a quantitative analysis followed by a qualitative analysis:
    • Quantitative Analysis – 3 factors in 2 categories:
      • Relative Alignment—2 factors are analyzed to determine the PFP alignment within a group of companies similar to the company in market cap, revenue (or assets) and industry:
        • The degree of alignment between the company’s TSR rank and the CEO’s total pay rank within the peer group as measured over 1- and 3-year periods (weighted 40/60), to put more emphasis on longer term);
        • The multiple of the CEO’s total pay relative to the peer group median, which may identify cases where a high performing company may nevertheless be overpaying.
      • Absolute Alignment—this factor measures long-term alignment between pay and company performance as:
        • Alignment between the trend in the CEO’s pay and the company’s TSR over the prior 5 fiscal years – difference between the slope of annual pay changes and the slope of annualized TSR changes during the 5-year period
      • Peer Alignment and Absolute Alignment may be weighted 50/50 in this portion of the analysis. Companies demonstrating a weak alignment will receive further qualitative review to determine a final vote recommendation.
      • Qualitative review will consider:
        • The ratio of performance- to time-based equity awards
        • The overall ratio of performance-based compensation
        • The robustness of disclosure an rigor of performance goals
        • The company’s peer group benchmarking practices
        • Actual results of financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers
        • Special circumstances related to, for example, new CEO in prior FY or equity grant practices (e.g., biannual awards)
        • Any other factors deemed relevant
      • Request for comment:
        • Do the factors utilized in ISS’ proposed pay-for-performance evaluation approach align with those that your organization believes should be considered?
        • Does the proposed new approach give adequate consideration to long-term alignment?
        • Will the proposed new approach be beneficial to your organization in identifying companies with strong pay-for-performance alignment?
        • What additional factors, if any, should ISS consider and display to improve investors’ ability to evaluate companies’ long-term pay-performance alignment?

Say on Pay Lawsuits Update

On September 29, 2011, in News, Say on Pay, Say on Pay Lawsuits, by Ed Hauder

Cincinnati Bell – lawsuit can proceed

According to the judge in this case, the “plaintiff has made adequate pleadings that ‘the Cincinnati Bell Board is not entitled to business judgement protection for its 2010 pay hikes.” Therefore the judge denied the company’s and other defendants’ motion to dismiss.  More information can be found in this story from the Business Courier:


Beazer Homes USA – lawsuit dismissed

According to the end of this article from Thomson Reuters, the judge in the Beazer Homes USA say on pay case, dismissed the lawsuit.



The charts below detail the level of support FOR say on pay (SOP) votes at S&P 900 companies and voting statistics regarding such support for SOP votes as of September 27, 2011 (click on the charts to enlarge):


The chart below looks at the say on pay frequency (SWOP) recommendations made by the S&P 900 companies compared to the actual SWOP that the companies announced they would adopt as of September 27, 2011 (click on the chart to enlarge):


Below are the say on pay (SOP) frequency recommendations from the S&P 900 companies (all the S&P 500 and S&P 400 companies) as of September 27, 2011 (click on the chart to enlarge):


Please click on the graphic below to bring up a chart showing the companies that have received less than 50% FOR support on their Say on Pay (SOP) votes or that disclosed that their SOP proposals did not pass so far in 2011. Note that some of these companies have reported that their SOP votes passed (most likely because abstentions were not counted).


On August 1, 2011, ISS published its preliminary report of the 2011 proxy season.  The report is available for download here (free registration required):


Key findings of the report related to say on pay include:

  • Average support for Say on Pay votes was 91.2%
  • Say on pay votes failed at 37 Russell 3000 companies (1.6% of total companies reporting vote results)
  • The primary reason for failed say on pay votes appears to have been pay-for-performance concerns, which were identified at 27 of the companies whose say on pay votes failed
  • Largest number of failures (about 25% of total) occurred in the energy sector
  • Investors also registered significant opposition to the say on pay votes of homebuilders
  • Vote No campaigns were run by the American Federation of State, County, and Municipal Employees (AFSCME) against the say on pay vote proposals of 5 companies: Pfizer, Johnson & Johnson, Alcoa, ConocoPhillips, and ExxonMobil
  • Through June 30, 2011, annual say on pay frequency gained majority (or plurality) support at 1,792 companies in the Russell 3000 companies
  • Two companies (Annaly Capital Management and American Reprographics) announced that they will implement triennial say on pay votes, even though their shareholders gave majority support to annual say on pay votes
  • The 168 companies that received greater than 30% opposition on their say on pay votes in 2011 will receive greater attention in 2012

On July 8, 2011, the Securities and Exchange Commission (SEC) issued several Compliance & Disclosure Interpretations (C&DIs) applicable to say on pay (SOP) and say when on pay (SWOP) proposals. In summary, the SEC guidance indicates:

  • When reporting the voting results pursuant to Item 5.07(b), they are not required to state the number of broker non-votes with respect to SWOP proposals. However, a company can disclose the number of broker non-votes if it believes it would be useful to investors. (Question 121A.03), and
  • Companies may disclose their decision as to the frequency of SOP proposals in a periodic report (Form 10-Q or Form 10-K) instead of in a Form 8-K (Question 121A.04).

The charts below detail the level of support FOR say on pay (SOP) votes at S&P 900 companies and voting statistics regarding such support for SOP votes as of July 6, 2011 (click on the charts to enlarge):


The chart below looks at the say on pay frequency (SWOP) recommendations made by the S&P 900 companies compared to the actual SWOP that the companies announced they would adopt as of July 6, 2011 (click on the chart to enlarge):