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Issue 17 : Performance Issue

Time for an Upgrade?

Investors are interested in Pay for Performance, but many current proxies don’t adequately address the topic
By Ron Schneider

Many institutional investors have been focused on executive compensation— particularly CEO pay—for years, even prior to the near-universal adoption of Say on Pay votes in the U.S. in 2011. While some investors focus on the absolute amounts and related trends, most are more interested in understanding how these pay plans work, and how the resultant pay outcomes align with relevant measures of executive and company performance. In fact, the number one question investors would like answered is, “How does the executive pay program support company strategy?”

Say On Pay Votes Often Influenced by Murky Disclosure

In fact, in assisting certain companies with their post-meeting engagement efforts following less than stellar Say on Pay votes, I have heard investors—when confirming that they had voted against—indicate that a major driver of their negative votes was not pay per se, but rather their concerns about the relevance and rigor of performance metrics for short- and/or long-term incentives. Such comments ranged from “We didn’t understand their relevance or appropriateness given your industry” to “They appeared to be lay-ups.” Other investors indicated they had experienced difficulty locating these disclosures or had missed them entirely—generally in cases where they were disclosed in dense text and not highlighted in an easier to locate tabular format.

Consider the situation where a proxy advisory firm has issued negative Say on Pay or equity plan vote recommendation. Many institutional investors use proxy advisors primarily as data aggregators or screening tools and seek to vote thoughtfully and independently, doing so typically in the final week or two prior to the annual meeting. When they either cannot quickly locate key information to support a positive vote—or when they do and it isn’t clear and compelling—they probably are not going to have the time or inclination to call a company up and ask you for clarification (i.e., provide that “second bite at the apple”). Rather, they may simply vote against and move on to their next portfolio company’s proxy.

Investor Interest in Performance Measures Is High

Both the initial RR Donnelley investor survey about proxy statements conducted in 2013 and the more recent and expanded investigation, conducted jointly by RR Donnelley, Equilar, and Stanford University’s Rock Center for Corporate Governance, confirmed that performance metrics is one of two topics investors most highly scrutinize in company proxies (the other being director independence, skills, and qualifications).

The survey results provide strong support for the importance of companies explaining their pay plans, how they work and the resultant pay outcomes clearly and credibly. This not only can help secure voting support for Say on Pay, but also can improve the companies’ investment appeal. To highlight a few questions from the recent joint survey:

When asked “Which of the following sections of the proxy does your firm read and rely on to make voting decisions? (select all that apply),” the top three responses out of 20 available choices were:

  • Pay for performance alignment – 64%

  • Director independence – 62%

  • Performance metrics – 62%

When asked “Which of the following sections of the proxy does your firm read and rely on to make investment decisions? (select all that apply),” the top three responses out of 20 available choices were:

  • Performance metrics – 40%

  • Pay for performance alignment – 34%

  • Corporate governance profile (including shareholder rights and antitakeover measures) – 33%

That is what investors report they are most interested in. So how do they grade company proxy disclosures on these key topics?

Investor Reactions to Key Topic Disclosures Are Mixed

When asked “On average, how clearly and effectively is information disclosed in the following sections?” the results were less than stellar.

  • Performance measures: 13% chose “very,” 79% chose “somewhat,” and 8% chose “not at all”

  • Parsing this topic further, when asked whether performance-based compensation plans are based on rigorous goals:

  • 6% chose “very,” 52% chose “somewhat,” and 42% chose “not at all”

These results represent investor views of average or “typical” U.S. company proxies. Clearly, many companies are already doing a superior job of clearly communicating how their pay plans work, how they support company strategy, and why the resultant pay outcomes are appropriate. In the event of negative proxy advisor recommendations on Say on Pay or equity plan proposals—because they are providing investors with the information and ammunition they need to make thoughtful, company-specific voting decisions—these companies may fare better at the ballot box than companies with more opaque disclosures.

For other companies, this wide variance in the quality and clarity of company disclosures provides them with an opportunity to upgrade their compensation disclosures going forward in order to better meet their investors’ informational needs. Questions they can ask themselves include:

  • Is the level and clarity of our disclosures about performance metrics, weightings (if used), and target levels of performance on par with those of our peer companies? If so,

  • Is the information easily found, whether through a listing in the table of contents, a location under a relevant subject matter heading, or a display in a tabular or other eye-catching format? And most important,

  • Are we making it easy for investors and others to understand our pay plans, how they support company strategy, and thus, why they deserve investor support?

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Ron Schneider

ron schneider

Director of Corporate Governance Services at RR Donnelley, and can be reached at

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