Outraged observers are hailing the rejection of Citigroups compensation package for its top executives as proof that "say on pay" is working that the Dodd-Frank Wall Street Reform and Consumer Protection Act was good legislation.
Not so fast.
Yes, investors finally woke up to the notion that some top executives are getting outsized compensation for ordinary or mediocre results. But so far, the great say on pay has hardly done its job.
Just 41 companies last year got the thumbs down, or less than 2 percent of the total companies that held a vote, according to ISS.
Whats more, 91 percent of shareholders approved the pay under say on pay at the 98 percent of Russell 3000 companies who received majority shareholder support through June 30, 2011, according to the law firm Foley & Lardner.
And just four companies so far in the 2012 proxy season, including Citi, have had executive pay packages voted down by shareholders, according to ISS.
Last year was the first year that Dodd-Frank required publicly traded companies to hold say-on-pay votes. In 2009 and 2010, only TARP firms were required to hold say-on-pay votes, but several dozen nonfinancial firms held voluntary votes, ISS points out. In 2009, there were 148 say-on-pay votes at Russell 3000 index companies, none of which failed. In 2010, there were 151 and only three Occidental, Motorola and KeyCorp (which was a TARP firm) failed. Those companies that do find their packages rejected have the option of ignoring the votes, since the result is not binding; and shareholders can struggle to remove disliked directors from classified boards, since the whole slate of directors is not up for election at once.
Consequently, few companies whose say-on-pay vote failed have altered their policies. Of the 41 companies that saw its pay package rejected last year, so far just two stepped up and changed their arrangement Beazer Homes and Jacobs Engineering.
According to ISS, Jacobs cut its time-based stock awards, decreased the ratio of stock options and aggressively revamped its stock holding requirement. Whats more, total CEO compensation fell 17.6 percent. The upshot: The new pay package received better than 96 percent approval, according to ISS.
Beazer eliminated time-vesting restricted stock, changed its pay-for-performance hurdles and overall made its severance programs more shareholder friendly, according to ISS.
Not coincidentally, both companies were targets of lawsuits, although both of them were dismissed.
In September 2011, Beazer was able to get a dismissal of a lawsuit filed by Teamsters Local 237 against the companys directors and others in a Georgia state court. The Teamsters case alleged the boards decision to increase CEO and top executive pay in 2010 despite a massive loss recorded by the company were disloyal, unreasonable and not the product of a valid exercise of business judgment; and it violated the companys pay-for-performance policy.
In March 2012, a Los Angeles Superior Court dismissed a complaint against Jacobs that alleged that the poor financial performance made their authorization of significant pay increases for executives unreasonable, disloyal, and not in good faith, and violated the Boards pay-for-performance executive compensation philosophy, according to executiveloyalty.org, a personal blog by Mark Poerio, a partner with the law firm Paul Hastings.
So far, a total of 13 say-on-pay-related lawsuits have been filed against 11 companies, according to the website. Four of them have been dismissed or recommended for dismissal, according to the website the ones involving Beazer and Jacobs as well as lawsuits involving Biomed Realty and Umpqua Holdings.
The Umpqua case, which reaffirmed directors authority to determine executive compensation, was the first federal court decision to dismiss a say-on-pay action, according to Paul Rowe, a partner in the litigation department at Wachtell, Lipton, Rosen and Katz.
Meanwhile, other companies are trying to work with shareholders. For example, last year in response to a lawsuit, KeyCorp agreed to make changes to its compensation practices and procedures and to pay $1.75 million to the plaintiffs law firms.
In December 2011, Cincinnati Bell approved a proposed settlement of a derivative lawsuit arising from a say-on-pay vote taken at the companys May 2011 annual meeting. Phillip Cox, chairman of Cincinnati Bells board of directors, said in a press release at the time that the proposed settlement includes features which will clarify the companys executive compensation policies and which will more clearly communicate these policies to shareholders.
However, last August a different case against Cincinnati Bell NECA-IBEW Pension Fund v. Cox survived a motion to dismiss. Poerio explains in his blog the case is a fiduciary breach complaint against Cincinnati Bells officers. The Ohio District Court asserted: These factual allegations raise a plausible claim that the multimillion dollar bonuses approved by the directors in a time of the companys declining financial performance violated Cincinnati Bells pay-for-performance compensation policy and were not in the best interests of Cincinnati Bells shareholders and therefore constituted an abuse of discretion and/or bad faith.
With language like that from the court, look for Cincinnati Bell to settle this case.
And as more cases survive motions to dismiss, look for more lawsuits and settlements stemming from say on pay, perhaps it will soon be known as "sue on pay".