The 2017 proxy season is here, and annual meeting volume is about to accelerate. Support for say-on-pay resolutions, at over 90% on average, is strong, right? Isn’t a favorable say-on-pay vote sufficient to avoid the microscope with shareholders, proxy advisors and the media? Unfortunately, not always.
Sometimes companies anticipate they will face a tough say-on-pay or equity-plan vote, and other times it comes as a surprise. In either case ― even for companies with a perfect record of strong support for their executive compensation programs ― there are four steps that can better position a company to respond to scrutiny if necessary:
Amid all of the preparation for your annual meeting, a few simple steps are warranted regardless of whether scrutiny of executive compensation is expected. These fall under the category of “good housekeeping” and include actions such as reviewing prior feedback from shareholders and proxy advisors, understanding the timing of their reviews once your proxy statement is filed and confirming how you will obtain copies of proxy advisor reports. It’s also prudent to consider who, internally and among your advisors, you would want to inform and involve should your executive pay programs or decisions come under greater examination than you typically receive.
More homework is necessary if you expect a challenging say-on-pay vote or scrutiny in other areas, such as an equity-plan proposal. Most of these steps are best taken in advance of filing your proxy statement. They consist of testing your pay-for-performance alignment from a variety of perspectives (including those of proxy advisors), submitting any recent peer group changes during the relevant window, monitoring the data captured for your ISS Quality Score and ensuring you are signed up for the relevant proxy advisor data review portals.
Another key step relates to your Compensation Discussion and Analysis (CD&A), a component of the proxy that has evolved over the past few years. As your draft CD&A comes into focus, it’s valuable to have someone removed from the writing process conduct an independent review for readability and clarity, not for compliance. Language that’s unclear or areas that would benefit from additional context can be identified.
Intelligence gathering on your large institutional investors is another preparation best done early. Toward this end, gather and review their published policies, often available on their websites, and understand any influence proxy advisors may have with your key investors. You may need to look at prior voting patterns and determine whom to call and when. Some or all of this activity may be part of your shareholder outreach activities or may be supported by outside advisors such as proxy solicitors, compensation consultants or outside counsel. In aggregate, this can also be done after a proxy filing, but that carries the risk that key internal and external participants may not have adequate time or availability for intelligence gathering if left to the last minute.
This is where your earlier planning and preparation become key. Shareholder communication to obtain support for your executive compensation programs is critical, particularly if you are receiving early negative votes from them or negative voting recommendations from proxy advisors. During proxy season, timely execution on these actions is essential. There’s typically a short window to make your case to shareholders before they vote or, if needed, to solicit them to change their votes. The medium for your message is also important. Among the key issues to consider:
Do you need to make a change to your pay program, commit to review a program element/decision or simply provide additional detail or context in your disclosure?
Do you need to prepare a filing or talking points (or both)?
Who will serve as the messenger in this process? Is that messenger prepared to not only address the circumstances at hand, but also to have the necessary background information and credibility to enter into any discussions with shareholders or proxy advisors?
A draft agenda will help move this process along efficiently. A good starting point is to base an agenda on prior engagement resources ― or even the key points from the Executive Summary of your CD&A.
At this stage a few other considerations are equally important. One is tone, as the delivery is key. While correcting factual errors or providing constructive context make sense, rebuttals to proxy advisor vote recommendations or methodologies are much less helpful. It’s generally not a case of who might be wrong but of why the company’s executive pay programs and decisions merit support from shareholders, particularly if unique circumstances present themselves. Your board and compensation committee should also be top of mind. They benefit from being part of this process and importantly, having the opportunity to not only participate but to be part of the solution.
If a negative voting outcome occurs, the activities outlined above will form part of your go-forward process. And even if your annual meeting was smooth sailing, these activities are a valuable part of a preparation toolkit. After your annual meeting, a few additional steps are helpful as part of your compensation planning calendar:
- Conduct one or more debriefs with your internal team, key advisors and the board (or compensation committee).
- Use this post-mortem to weave in shareholder feedback to inform future discussions and actions ― and then remember to explain this in your next CD&A.
- If more specific follow-up actions on compensation are needed, determine what needs to take place and work those into an updated calendar.
- Discuss the merits of establishing proactive and ongoing engagement with shareholders on an annual basis, rather than as needed in times of crisis.
Left unaddressed, irritants that lead to negative votes can fester, leaving a company open to things like shareholder proposals related to executive pay or even proxy access. They can even result in votes against compensation committee members due to a perceived lack of responsiveness.
Given the variety of pay issues that can arise and the different shareholder profiles and policies, there’s no one answer that will work for every company in this or any proxy season. While learning from peers can be helpful, one company’s experience or actions may not translate. Each company will need to act in a way that’s best suited for its situation. In short, your company will have to deliver the right message, through the right messenger(s) to the right audience(s) at the right time to make your case to shareholders and mitigate or respond to unwanted scrutiny. Preparation, as always, is key.