Say on Pay

2012 Say On Pay Majority Vote Failure Number Five

By Deborah Nielsen

The trail of tears in the exec comp world is ramping up in 2012. Several public companies have now seen failures in say on pay majority voting (running total is now at 5) and quite a number more coming in below 70%.

The most recent in the small number of companies under 50% was

FIRSTMERIT CORP /OH/ voted 46% on 4/18.  In this year’s Def 14A (filed 3/8/12) they highlighted an 87% vote last year.

Arguably the biggest news in majority failures though this year is Citigroup with support of only 45%.

In follow up to the announcement of votes a suit is being filed in New York by shareholders alleging a failure on the part of directors to fulfill their fiduciary duties. Read more about this.

Also among the list of majority failures is KB Home.  They were the third public company in 2012 to fall below 50% support in their shareholder say on pay vote, coming in at 45.6%  at their 4/12/11 shareholder meeting (per their tabulation, using abstentions – approximately 48% without abstentions). I had a chance to look at their proxy filing in more depth.

While the company has on an ongoing basis reduced total cash compensation, long term incentives and total compensation for their CEO and other NEOs and gone to great lengths in their proxy to explain how they have linked pay to performance and why they feel that their compensation practices are necessary to attract and retain talent in a critical time for the company shareholders have responded to discouraging financials at the time of the vote.

Specifically the company highlighted in their proxy this year that they hired two new named executive officers who were eligible as participants in the company’s 2001 change in control (CIC) severance plan which includes a gross up payment. Prior to the annual meeting shareholders expressed their opposition to the extension of gross up payment benefits which are a notorious sore point in executive compensation and on a targeted list of items that are apt to result in negative vote recommendations from shareholder advisory services. In our tracking of post employment and perks and benefits trends over the last several years the granting of gross ups has been dropping but still has some prevalence.  In response to this feedback from shareholders this benefit to Kaninski and Woram was rescinded and the board approved a policy that no officer or employee hired or promoted after April 7, 2011 will receive the benefit.

Additionally the company highlighted improvements in key financial metrics in 2011 during a difficult housing market, pay for performance components and notable compensation plan features some of which I have included below.

Performance-Based Pay Components

Pay Moderation. Aligning with our financial results during the ongoing housing downturn, we have frozen base salaries and reduced overall compensation paid to our NEOs, while balancing retention goals. Reflecting this performance-based focus, while our NEOs have met challenging annual incentive targets, the Compensation Committee has exercised its downward discretion in each of the last four years to reduce annual incentive payouts below what our NEOs were eligible to receive. Our CEO’s 2011 annual incentive payout was 61% lower than the amount he was eligible to receive and nearly 30% lower than his 2010 payout. We have also lowered the grant-date fair value of NEO long-term incentives. For our CEO, the grant-date fair value of his 2011 fiscal year long-term incentives was 18% lower and 35% lower than that of his 2010 and 2009 fiscal year long-term incentives, respectively. Base salaries for our NEOs and other senior executives (excluding new hires) have been frozen for at least three years, and our CEO’s base salary has remained at the level set by the Board when he was promoted to the position in 2006.

CEO Performance Options. As with his 2011 fiscal year long-term incentives, a majority of our CEO’s 2012 fiscal year long-term equity incentives consisted of performance options that vest over a three-year period if certain objective operating margin and/or customer satisfaction performance metrics are achieved, or they are forfeited. These grants underscore the Board’s commitment to make the vesting of a majority of equity compensation grants to our CEO contingent on the achievement of long-term objective performance metrics.

Stock Option Grants. Our other equity-based 2012 fiscal year long-term incentives consisted solely of stock option grants. We view stock options as inherently performance-based and stockholder-aligned incentives because their value to recipients depends on the price of our common stock rising.

Performance Cash. In lieu of time-vesting restricted stock or restricted cash incentives, we granted performance cash to our NEOs and other senior executives as a 2012 fiscal year long-term incentive. The ultimate value of this performance cash depends on our annual operating income results against performance goals set by the Compensation Committee for each year of a three-year period. Performance cash payouts at the end of the performance period will be reduced, possibly to zero, if target performance is not met

Notable Compensation Program Features

Over the last few years, we have put in place a number of stockholder-focused compensation policies, programs and practices, including the following:

Limited Perquisites. Consistent with our efforts to reduce overhead and other expenses, we have cut substantially all perquisites for our senior executive management. Perquisites are limited to relocation assistance to recruit certain new hires, the provision of market-competitive supplemental medical and deferred compensation programs and certain death-related benefits, and, for very few current senior executives, participation in a retirement plan that was closed in 2004. In 2007, we ceased providing personal automobile allowances, as well as reimbursements for automobile fuel cards and insurance, as well as for tax preparation and financial/estate planning services.

No New Tax “Gross-Up” Benefits. As discussed above, our Board approved a policy that no officer or employee who is hired or is promoted after April 7, 2011 will receive the Gross-Up Payment benefit under the CIC Plan in connection with such hiring or promotion. Consistent with this policy, in 2011, we did not extend the Gross-Up Payment benefit to any newly hired or promoted officers or employees who would have been eligible to receive the benefit under the terms of the CIC Plan

Stock Ownership Requirement. Our senior executive management must comply with strict stock ownership requirements throughout the period of their employment with us.

Compensation Clawbacks. Under his Employment Agreement, our CEO is required to repay certain compensation he receives if we are required to restate our financial results due to his misconduct, consistent with Section 304 of the Sarbanes-Oxley Act of 2002. In addition, we will recoup executive officer compensation, or a portion thereof, to the extent required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) and any rules, regulations and listing standards issued under that act.

Severance Pay Limits. Under our Policy Regarding Stockholder Approval of Certain Severance Payments, which was adopted in 2008, we will obtain stockholder approval before paying severance benefits to an executive officer above 2.99 times the sum of the executive officer’s then-current base salary and target bonus under any severance arrangement made or materially changed after this policy was adopted.

Equity-Based Award Grant Policy. Since 2007, all grants of equity-based compensation are subject to our equity-based award grant policy, which sets stringent requirements as to the timing and manner in which equity-based awards are made, as well as certain internal controls over the grants of such awards.

Prohibition on Hedging/Pledging of KB Home Securities. Our senior executives are prohibited from engaging in short sales of our securities and from buying or selling puts or calls on, or any other financial instruments that are designed to hedge or offset decreases or increases in the value of, our securities (including without limitation derivatives, prepaid variable forward contracts, equity swaps, collars and exchange funds).

Regardless of the changes the company did or did not make to forestall negative reception on the part of shareholders the votes did not go in their favor.

The running tallies on companies coming in below 70% is much longer, including the sample below who have filed since January. I can’t be certain I have caught all of them but this is a pretty exhaustive list.

HUNTINGTON BANCSHARES INC/MD voted 61% of 4/19/2012

COGENT COMMUNICATIONS GROUP INC voted 68.3% on 4/19/2012

UNITED TECHNOLOGIES CORP /DE/   voted  61% on 4/13/2012

GREENHILL & CO INC  voted 60% on 4/13/2012

ADOBE SYSTEMS INC voted 58% on 4/12/2012

Bank of New York Mellon CORP voted 58% on 4/10/12

CONCUR TECHNOLOGIES INC voted 62%. Results were reported 03/19/2012

WALT DISNEY CO voted 57% on 03/19/2012

Cogdell Spencer Inc. voted 65% on 03/09/2012

AECOM TECHNOLOGY CORP voted 58% on 03/08/2012

TransDigm Group INC voted 54% (including abstentions, as stated by the company) on 02/23/2012.

ENZO BIOCHEM INC voted 57% on 2/1/12.

MULTIMEDIA GAMES HOLDING COMPANY INC voted 56% (including abstain and broker non-votes per def 14) on 02/01/2012

COMTECH TELECOMMUNICATIONS CORP DE voted 68% on 01/13/2012

GREENBRIER COMPANIES INC received a vote of 52% on 01/06/2012

For others it is better news. Among those who came in below 50%  last year things are looking up.

STANLEY BLACK & DECKER INC voted 93.7%. (Last year they voted 39%)

UMPQUA HOLDINGS CORP voted 95%. (They voted 35% last year)

On Friday 3/23/11 HEWLETT-PACKARD CO voted 77% (including abstentions) vs a support level of 48.7% last year.

Shuffle Master Inc voted 86% vs 44.5% last year

BEAZER HOMES USA INC –Voted 97% this year relative to 46.1% last year.

Jacobs Engineering filing on 1/27/12 logged 98% support relative to support levels in 2011 of 45%.

There is no doubt that for some organizations voting results were more of a surprise than to others both good and bad and that those who fell below 50% last year took the vote seriously and made some changes. There is a lot left of proxy season and shareholder voting. Shareholder outreach and plan modifications aside, many question the impact of stock price at the time of the vote and the power of shareholder advisory services, justified and unjustified, in voting patterns rather than how well plans are designed as drivers of voting patterns but expect more surprises and more blogging before it is done.


Deborah Nielsen

Deborah Nielsen

Deborah Nielsen, Head of Compensation Research, has been with Kenexa/Salary.com for six years. She manages a team which researches, evaluates and publishes data for corporate, compliance and governanc ...(Read More)

Posted in: Compensation, Leadership

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