Questioning High Approval Rates for Executive Compensation
Overwhelmingly, shareholder votes are approving executive compensation. A survey conducted by consulting firm Towers Watson found that 90% of companies said their executive pay packages received approval ratings of 71% or higher. More than half of all companies (61%) had approval ratings of 90% or higher.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies to hold a shareholder vote on compensation at least once every three years (www.sec.gov/news/press/2011/2011-25.htm). The votes are non-binding, meaning the companies do not have to honor shareholder requests on pay. Nonetheless, as the numbers show, few compensation plans are voted down.
There are reasons for shareholders to question whether the proposed compensation packages are in their best interest. Most companies surveyed (81%) said they defined the peer group they used to analyze executive compensation. In contrast, just 34% used a proxy adviser peer group and only 17% used an industry index. The definition of the peer group is important because slightly more than half (52%) of companies use a summary compensation table pay to perform the analysis. (The summary compensation table is required by the Securities and Exchange Commission to show what executives are earning.) In other words, compensation committees are handpicking the companies to measure pay against.
The metrics for assessing performance should also raise questions. Nearly three-quarters of companies (73%) used total shareholder return as a performance measure in the analysis. In contrast, less than a quarter considered return on equity/assets/investment/capital (23%) or net income (22%). Though generating shareholder return is important, executives should be focused on creating long-term value for shareholders, not just simply short-term returns.
Inputs for compensation remain largely in the hands of corporate insiders. Boards of shareholders and compensation committee preferences influenced decisions on compensation for 77% of companies. Advice from compensation consultants was weighed at 74% of all companies. In contrast, discussions with shareholders were only considered by 38% of all companies.
This data shows the importance of voting proxy statements and attending shareholder meetings if possible. Though good executives should arguably be rewarded well, boards of shareholders should be held responsible for acting in the best interest of shareholders.
Source: “Getting Pay for Performance Right: Executive Compensation Flash Survey Findings,” Towers Watson, October 2012.