High CEO pay weakens shareholder support

Companies that provide their CEOs with high pay opportunities are typically receive lower levels of shareholder support for their say-on-pay votes than those with smaller pay opportunities, according to a new study by Towers Watson.

Additionally, the study reveals the chances of receiving lower levels of shareholder support triples for companies with poor performance as opposed to those that are top performers.

In fact, 32 percent of respondents with high CEO pay opportunities report low say-on-pay shareholder support at less than 70 percent in last year’s proxy season in comparison to only 19 percent of respondents with CEO pay opportunity around the median. Among the respondents that performed poorly, they were more than three times as likely to receive less than 70 percent of shareholder support for say-on-pay than those with top levels, despite their pay levels.

“While say-on-pay votes primarily reflect absolute levels of pay for companies with high pay levels, they can become say-on-performance votes when companies do poorly in generating shareholder returns,” says Todd Lippincott, leader of Towers Watson’s executive compensation consulting business for the Americas. “The strong connection among say-on-pay outcomes, executive pay opportunities and shareholder returns indicates that other efforts like eliminating certain pay practices, such as change-in-control tax gross-ups, may have a limited impact on say-on-pay voting results. Based on our research, it appears companies that target high-pay opportunities run a much greater risk of unacceptable voting outcomes than companies that target median pay levels.”

According to the study, respondents with high CEO pay opportunities in 2008 and 2009 experienced similar levels of shareholder support, regardless of any modifications made for 2010. Seventy-eight percent of respondents that dropped pay for 2010 received shareholder support levels at more than 70 percent as opposed to 74 percent of those that remained at high pay levels. Still, respondents with median pay levels in 2008 and 2009 that raised their CEO pay opportunities to high levels in 2010 saw less shareholder support for their say-on-pay votes as less than two-thirds of those that made changed received acceptable shareholder support.

“It will be interesting to see how say-on-pay voting plays out in the 2012 proxy season, given that many companies had strong operating results last year, while their share prices and shareholder returns were flat,” Lippincott says. “Clearly, our research confirms that shareholder votes are strongly influenced both by the sheer size of the pay opportunity and the sensitivity of pay to performance, which many investors equate with shareholder returns.”

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