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November 10, 2011
Executive Compensation Policies Slightly Better After Say on Pay Regulation
    by Robert Kropp

GMI analyzes executive compensation packages at S&P 500 companies, and finds incremental improvement as well as a correlation between ratings and proxy votes.

2011 marked the first proxy season in which corporations were required by the Securities and Exchange Commission (SEC) to hold non-advisory votes by shareowners on executive compensation.

While the recently published Executive Pay Scorecard from GovernanceMetrics International (GMI) analyzes executive compensation packages at S&P 500 companies according to a set of ten metrics, GMI also compares its analyses to the results of say on pay proposals at the companies.

Poorly designed executive compensation packages were instrumental in encouraging the excessive risk-taking that led to the financial crisis. Sustainable investors and other activist shareowners were quick to respond with increasing numbers of proposals addressing those packages; their actions were instrumental in the SEC taking up the issue and eventually issuing the regulation mandating shareowner votes on say on pay.

GMI's analysis reveals incremental progress on the design of executive compensation packages at S&P 500 companies in 2011. The average score this year was 49 (out of a possible 100) compared to 45.3 in 2010. While the pay practices of 22.3% of companies still merit high concern, "The analysis clearly shows that the worst-scoring companies are outliers in the S&P 500," according to GMI.

Four companies whose pay packages rated as being of high concernóConstellation Energy, Janus Capital, Nabors Industries, and Mascoówere among the eight companies whose proposals failed to receive majorities of shareowner support. A fifth company, Freeport McMoRan, scored below the median.

GMI's analysis also includes case studies of corporate responses to say on pay proposals. After filing proxy materials disagreeing with the recommendation of Institutional Shareholder Services (ISS) to vote against their proposals, both General Electric and Walt Disney changed their compensation policies to conform more closely to the concerns of shareowners.

At Penn Virginia, where only 39% of shareowners supported management's proposal on compensation, A. James Dearlove, the CEO, resigned on the day of the vote.

GMI also announced changes in the composition of its 2012 Executive Pay Scorecard. Companies to be analyzed will increase to encompass the Russell 3000. Also, a metric analyzing whether incentives are based on performance will be replaced by one determining whether compensation at a company falls outside the range for industry and market capitalization peers.


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