Say on Pay & Frequency: Annual Recommendations Take the Lead and a Third Say-on-Pay Proposal Fails

By Amy Muecke

Below are the say-on-pay statistics, updated to account for filings made during the last two weeks, and related thoughts. As you will see, it has been an interesting couple of weeks – for recommendations to stockholders on how often say-on-pay votes should be held, annual recommendations have officially taken over and are now leading and a third company, Shuffle Master, just reported that its say-on-pay proposal failed. 

Frequency Recommendations

Here are the latest statistics prepared by Mark Borges of CompensationStandards.com regarding the recommendations in the 739 proxies for annual meetings with frequency of say-on-pay proposals that have been filed as of March 18, 2011:

• Annual: 361 ( ~49%)
• Biennial: 25 (~3.5%)
• Triennial: 328 (~44%)
• No Recommendation: 25 (~3.5%) <

Here are the statistics on the recommendations in the 374 proxies filed since our last update (between March 7 and March 18):

• Annual: 214 ( ~57%)
• Biennial: 9 ( ~3%)
• Triennial: 146 (~39%)
• No Recommendation: 5 (~1%)

Here are updated industry-specific statistics we obtained using an ISS database:

• Of 26 companies in the pharmaceuticals & biotechnology industry who have filed proxies, 6 recommended annual votes, 2 recommended biennial votes, 16 recommended triennial votes and 2 made no recommendation
• Of 38 companies in the healthcare equipment & services industry who have filed proxies, 15 recommended annual votes, 3 recommended biennial votes, 18 recommended triennial votes and 2 made no recommendation
• Of 28 companies in the software & services industry who have filed proxies, 16 recommended annual votes, 2 recommended biennial votes and 10 recommended triennial votes 
• Of 40 companies in the technology hardware & equipment industry who have filed proxies, 16 recommended annual votes, 4 recommended biennial votes, 18 recommended triennial votes and 2 made no recommendation
• Of 93 companies in the capital goods industry who have filed proxies, 46 recommended annual votes, 3 recommended biennial votes, 42 recommended triennial votes and 2 made no recommendation

Frequency Results

According to Mr. Borges, to date stockholders at ~41% of the 106 companies that have made triennial recommendations (and disclosed the results from their meetings) have supported annual – not triennial – votes and excluding smaller reporting companies, stockholders at ~37% of the 87 companies that have made triennial recommendations have supported annual votes.

In terms of recently filed interesting results, Green Mountain Coffee Roasters (GMCR) recently reported that stockholders expressed a very narrow preference for triennial votes (49.98% as opposed to annual votes, which received 49.36%). Although the board initially recommended that stockholders vote for triennial say-on-pay votes and in its proxy GMCR explained that "the alternative receiving the greatest number of votes—every year, every two years or every three years—will be the frequency that shareholders approve," the company disclosed in the 8-K reporting the results that the board had already considered the outcome of the vote and determined that the next say-on-pay vote would be held at the 2012 annual meeting.

It will be interesting to see how GMCR's decision is perceived by its stockholders and proxy advisory firms next year. Perhaps the vote was too close for GMCR's board to have considered any frequency approved by stockholders on an advisory basis and the board instead decided to hold annual votes in line with what is viewed by ISS and certain others as the "best practice", but technically the board did select a frequency that is contrary to the frequency supported by the greatest number of votes cast by its stockholders. <

Note that ISS has not yet determined its policy in the event that a board decides not to adopt the say-on-pay vote frequency supported by a majority or plurality of votes cast. According to an ISS FAQ, ISS will determine its policy after the first year of voting results and after consultation with its clients and likely won't announce the new policy until late November 2011 when policy updates for 2012 are issued.

Say-on-Pay Recommendations and Results

To date, ISS has issued vote recommendations for 308 say-on-pay proposals. ISS has recommended voting FOR 279 (90%) of these proposals and AGAINST 29 (10%) of these proposals.

Following Jacobs Engineering and Beazer Homes USA, a third company – Shuffle Master – reported today that its say-on-pay proposal failed, obtaining only 44.5% of the votes cast (55.4% voted against the proposal and 0.1% abstained). View Shuffle Master's 8-K reporting the results.

Note that ISS recommended that stockholders vote against this say-on-pay proposal because Shuffle Master entered into a new employment agreement with its COO and interim CEO with a modified single-trigger or "walk-away" provision, providing for severance payments in the event the executive's employment is terminated for any reason within 90 days of a change in control of the company – a provision that ISS deems a "poor pay practice" because "the executive can unilaterally decide whether or not to continue employment and may not be sufficiently motivated to stay with the company given the prospect of unconditional payment" and "the executive could use the prospect of these severance payments as leverage in negotiations for a new contract after a change in control."

According to Shuffle Master's proxy, it has low inside ownership (directors and officers collectively own ~2.56%) and according to Yahoo!Finance, Shuffle Master has over 85% institutional ownership, which helps explain why the ISS vote recommendation was likely influential among the company's stockholders.

Interestingly, Shuffle Master filed a second 8-K today reporting the terms of an employment agreement with a new CEO whose employment will commence on April 1, 2011. The new CEO's employment agreement does not contain the modified single-trigger or "walk-away" provision.

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