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Nay on Pay: Shareholders Say No to Four Pay Plans (So Far)

The business leaders who objected to giving shareholders a non-binding vote on executive compensation were wrong. They said shareholders did not care. They said shareholders weren't sophisticated enough to understand the complexities of executive compensation.

But the Dodd-Frank legislation for the first time made "say on pay" votes mandatory this year. Proxy season has just begun and shareholders have already voted against four pay plans, showing that they do care and that they are discerning enough to be able to tell the difference between a pay plan that may be excessive and one that has a material negative impact on shareholder value.

In each case, the particular offenses were in different categories, proving that shareholders are not applying one-size-fits-all formulas. The claim that shareholders would vote in a block as ISS directs is unfounded as well. Early numbers showed that ISS recommended no votes in 12 percent of the pay proposals. But only four got "nay on pay" votes (so far).

Take a look at the pay plans shareholders voted against -- and the compensation committee members who approved them.

  • Shuffle Master (SHFL): As Paul Hodgson of GovernanceMetrics International says, this company might want to change its name to Shuffle CEO, as it's gone through four chief execs in the past year. When its CEO died, the board, apparently with no succession plan in place, had two interim CEOs before selecting a new one. Hodgson says that the no vote on the pay at this company was probably based on its decision to exclude the million dollars in severance costs for two executives in order to meet its "adjusted" EBITDA target so it could pay out full target bonuses. Compensation committee: Daniel M. Wade (Chair), Garry W. Saunders, Louis Castle, John R. Bailey, Eileen F. Raney, A. Randall Thoman
  • Jacobs Engineering (JEC): The poor performance, rising base pay, restricted stock awards not tied to any performance goals and and unlimited discretion in awarding bonuses made this pay plan unpopular with shareholders, who like to see performance targets and strong links between pay and performance. Compensation committee: Admiral Benjamin F. Montoya (Chair), John F. Coyne, and Robert C. Davidson
  • Beazer Homes (BZH): As with Jacobs, Beazer has a combination of poor shareholder returns and pay that is not tied to performance goals. Beazer has also failed to implement clawback provisions or stock ownership guidelines for executives. Compensation committee: Larry T. Solari (Chair), Stephen P. Zelnak, Jr., Norma Proencio
  • Hewlett-Packard (HPQ): This one is a squeaker. The vote against was 50 percent and the vote for was 48 percent. Shareholder dissatisfaction with the pay at HP may reflect outgoing CEO Mark Hurd's $33 million departure package or the cushy welcoming pay of the new CEO, which included a $4 million signing bonus and a $4.6 million relocation allowance that does not have to be repaid if he lasted a mere 60 days. Or it could be the discretionary bonuses of $1.6 million handed out to other named executives, which were not tied to disclosed performance goals. Any of these would be enough of a reason for a no vote. Compensation committee: Lawrence T. Babbio, Jr. (Chair), Rajiv L. Gupta, John H. Hammergren, and Lucille S. Salhany
One more myth to put to rest -- the claim that no votes on pay would come from a small group of activists. At Beazer, for example, almost 15 percent of the stock is held by Fidelity and 81 percent is held by institutions. Shuffle has more than 87 percent institutional holdings.

Indeed, these early returns indicate that ownership may be as important a predictor of a no vote as the pay-performance link. The investors who care most and best understand the impact on shareholder value of excessive compensation are the same number-crunchers who make the buy-sell-hold decisions. Finally, excessive compensation is starting to be put to a real market test.

Illustration copyright 2011 by David Apatoff
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