“Danny, if I have to tell you one more time to stop jumping on the bed, you are going to get it!” The warning is not enough and Danny jumps on the bed again.
“Danny, next time you jump on the bed I’m taking away your allowance.”
Shareholders have become much like lenient, but frustrated parents.
This is how investors seem to be using Say on Pay (SOP). When you look at their SOP votes and filter out all of the noise, what they are really saying is:
“We want you to take this pay thing more seriously. If you don’t, we are going to get angry. If you keep it up, we are going to vote against you.”
Look at Citigroup. Their 2011 Say on Pay passed with over 80% of shareholders voting for it. This year they received a failing vote. In fact, nearly all of the companies who have failed thus far in 2012 received significant passing votes just a year ago. These same companies would have likely received passing votes prior to 2011, if Say on Pay had already been the rule of the land. So why is there negativity this year?
Shareholders have been talking about this for a while. Here’s a translation:
“You haven’t been listening to us and you are not learning your lesson. So, we’re going to punish you by making our disappointment public with a “no” vote. We are voting ‘no’ on your executive compensation. And, if you don’t fix this by next year and we have the same problem again, you’re really going to get it!”
Now of course, investors have little to threaten with, other than shame. Unlike mom, they can’t unilaterally take away executive “allowances.” Say on Pay is not a binding vote. It just allows them to voice concerns. To make a real impact, shareholders would need to have the votes to remove members of the Compensation Committee or other members of the Board. But, this is drastic action that has been seldom taken in the past. We haven’t yet seen this happen with Say on Pay in the US, but the rule is young and shareholders’ patience is shorter than ever.
Like frustrated parents, I can foresee the comments now.
“We told you to stop jumping on the bed. But, you kept on jumping. Then we ‘sent you to your room’ by voting no on your compensation package. But, the bouncing continued. Now, you’re being grounded for a week and are required to do extra chores, like making the company perform better, or get paid less. To prove we’re serious, you’re not allowed to play with your friends on the Compensation Committee anymore.”
Everyone has been given sufficient warning and time to prepare for Say on Pay. When a company fails, those of us outside might be surprised, but internally the company is unlikely to be caught unaware. It’s more likely they realized there was a good chance of failing. So instead, they felt that if they cajoled a few people, or got investors to understand the executives are not fully to blame for poor corporate performance, they could squeak by one more year.
Looking at the votes that have been coming in, there seems to be little doubt in the Say on Pay failures. When companies fail, it is pretty conclusive. The real doubt is in the passing votes. The average passing vote gains more than 85% of shareholder votes. Perhaps shareholders should be a little less lenient when they are giving their initial warnings so companies on the cusp can clearly understand that investors are serious. Or, perhaps companies should look at every positive vote with a more critical eye. An 80% vote this year, may simply be your shareholders saying:
“Danny, if you do that ONE MORE TIME…”