Say-on-Pay – Review of 2012 Proxy Season Results: Overall Shareholder Support Levels Were Consistent with 2011, but Failed Say-on-Pay Proposals Increased in 2012 as Shareholder Negative Votes Were More Concentrated; Results Indicate Greater ISS Influence

Sullivan & Cromwell LLP - July 17, 2012

2012 was the second year in which U.S. public companies were required to allow shareholders to vote on an advisory say-on-pay proposal to approve executive compensation. The average levels of shareholder support for say-on-pay proposals did not significantly change from 2011 to 2012, nor did the percentage of proposals that received the support of at least 70% of votes cast (a level seen by Institutional Shareholder Services, or ISS, and others as indicating a satisfactory degree of shareholder support).

There was, however, a marked increase in the number of “failed” votes – that is, companies whose say-on-pay proposals failed to receive the support of at least 50% of votes cast – although the absolute number of failed votes remained small. These results suggest that shareholders and proxy advisory firms are beginning to refine their analyses and focus their attention on companies that they perceive to have problematic compensation practices – particularly, a divergence between CEO pay and shareholder return compared with peers.

The 2012 results also suggest an increased influence in the say-on-pay recommendations of ISS, which provides voting recommendations to its institutional investor clients. Although ISS issued negative recommendations at roughly the same rate in 2012 as it did in 2011, companies that received ISS negative recommendations received lower average levels of shareholder support in 2012 than in 2011, and were more likely to have the proposal fail. This may reflect shareholders’ general acceptance of (or at least consideration of) ISS’s new pay-for-performance criteria, which took effect this year.

Although there was an increase in failed say-on-pay votes from 2011 to 2012, there was a general lack of recurrence of failed votes at individual companies. The vast majority of companies with failed say-on-pay votes in 2011 had their votes pass in 2012, in many cases with approval levels in excess of 90%. This indicates that companies were, for the most part, successful in engaging with shareholders and addressing their concerns through compensation changes and disclosure, and provides a promising path forward for companies that had challenging say-on-pay vote results in 2012.