Shareholders at the Top 50 Are Getting Tougher



Right or wrong, the public and political perception that undue risk taking and its link to pay was central to the financial crisis has fueled a resurgence in the discussions around executive pay. Those discussions and associated headlines are further stimulated by Dodd-Frank's requirement that shareholders be given their say on the topic. As top banks continue to face higher scrutiny on executive pay, shareholders have not been shy of giving the "thumbs down."

In the second year of Dodd-Frank's requirement that shareholders be given an advisory vote to ratify executive pay, many investors have publicly stated that they felt they were too lenient on companies during the 2011 proxy season, and that they would be tougher on say on pay proposals during 2012. And the results prove it.

At the largest U.S. banks by asset size, Management Say on Pay proposals fared somewhat worse this year than they did in 2011. For the second year, McLagan has analyzed the results of the 2012 Say on Pay votes at 50 of the largest U.S. banks.

Voting Results

A vast majority of the banks used in the 2011 study are included in this year’s analysis as only six banks were replaced.

The list of firms in our study is included in the Appendix.

In 2011, our Top 50 study showed that 100% of the banks received approval from shareholders on executive compensation. However, our 2012 study shows a slight decrease in the approval rate with 96%getting the “thumbs up.”Two banks failed to receive approval from shareholders on executive compensation in 2012 – both of whom received over 88% shareholder approval in 2011. 

Similar to last year’s study, at the median, 94% of bank shareholders voted affirmatively on pay for senior executives. While the lowest affirmative vote was 65% in last year’s study, this year shows a decline to 59%. 

Twenty-three of the Top 50 banks show a decrease in affirmative votes in 2012 vs. 2011, ranging from -1% to -49%. While the overall average rate of decline was -2% for all 50, among the 23 banks that showed a decrease from the prior year, the overall average rate of decline was -12%.

Are shareholders following ISS recommendations?

Of the Top 50 banks, ISS recommended against seven Management Say on Pay proposals this proxy season.  In two of those cases, shareholders agreed with ISS and shareholders rejected the 2012 proposals.

In contrast, ISS recommended against nine of the top 50 MSOPs during the 2011 proxy season and in none of those cases did shareholders reject the MSOP.  In considering ISS recommendations, it is important to note that since the Pay for Performance model only considers CEO pay, individual circumstances can materially skew results.

Were there fewer no's from ISS due to new rules?

Although overall results show that top bank shareholders are continuing to give majority approval on executive pay, it can be concluded that the increased engagement of shareholders in executive pay decision making and the impact of proxy advisory firms on influencing shareholders are creating a more challenging pay environment for companies.     

Prior to the 2012 proxy season, ISS considered its vote recommendation by assessing a firm’s executive pay practice in two primary areas:  “pay-for-performance” and “problematic pay practices.”  Most companies that received an unfavorable recommendation from ISS, ran afoul of the Pay-for-Performance policy.  ISS’s Pay-for-Performance policy applied only if a firm’s one- and three-year total shareholder return fell below median of an ISS designated group of peer firms.  For the 2012 proxy season, ISS implemented a new Pay-for-Performance methodology.  The new assessment now consists of three measures of alignment between executive pay and company performance relative to peers:

  1. Relative Degree of Alignment–Measures the percentile ranks of a company’s CEO pay and TSR performance, relative to an industry-and size-derived peer group, over one- and three-year periods.

  2. Multiple of Median–Measures the prior year’s CEO pay as a multiple of median pay of the ISS-established peer group for the same period.

  3. Pay-TSR Alignment–An absolute test that compares the trend of the CEO’s annual pay and the value of an investment in the company over the prior five-year period.

While there is no evidence ISS’s policies produced harsher recommendations for the Top 50, it is clear ISS’s new Pay-for-Performance methodology creates a greater degree of complexity for management.  Evaluating the potential impact of ISS recommendations on upcoming proxy ballots and engaging shareholders on the specifics of those recommendations is more time consuming and complicated under the new policies.

Active engagement with shareholders and effective disclosure of the policies and processes around pay decision making have been the most effective tools in managing potential issues around the shareholder vote on pay.

As recent incidents of failed Say on Pay proposals have shown, companies must continue to be mindful of the potential impact of the shareholder vote on pay.  To avoid these outcomes and prepare for next proxy season, firms can continue to do the following:

  • Analyze the shareholder base to determine the level of ISS or other advisory firm influence.
  • Monitor changes in each institutional investor’s proxy voting guidelines.
  • Audit compensation and governance plans and programs for any potential exposure to guidelines of proxy advisor groups and institutional investors.
  • Analyze and review 1-year, 3-year, and 5-year TSR relative to your ISS-established peer group.
  • Use the proxy Compensation Discussion and Analysis to clearly tell the “story” of executive pay and explain pay and governance decisions.
  • Be prepared to engage in meaningful dialog with shareholders.
  • Determine whether any problematic pay and/or governance practices exist, and make adjustments as appropriate.

Changes on Horizon

Companies will see several changes next year to Glass Lewis’ model for assessing executive pay.  Glass Lewis & Co. is currently the second largest proxy advisory firm in terms of market share in the United States, behind ISS. While their research and recommendations have not historically carried as much weight as those issued by ISS, the level of Glass Lewis influence is often company-specific and dependent on the specific investor constituency.  Companies should actively monitor their investor ownership to determine the level of ISS and Glass Lewis influence.

Effective July 1, 2012  Glass Lewis has revised the proprietary Pay for Performance model used to make vote recommendations on director nominees and Say on Pay proposals. Specifically, Glass Lewis has updated its model to change how:  (i) named executive officer (NEO) compensation is evaluated and (ii) peer groups are constructed.

NEO Compensation Evaluation

Historically, Glass Lewis has evaluated NEO compensation using the most recent fiscal year compensation totals as disclosed in the Summary Compensation Table. Under the new model, Glass Lewis will now utilize a three-year weighted average of total compensation for a company's NEOs relative to such compensation totals at the newly determined peer group.

Pay for Performance Peer Groups

Prior to the updated changes, Glass Lewis utilized four undisclosed industry peer groupings for its Pay for Performance evaluation. The new model utilizes a "market-based" peer group developed by Equilar. The new target peer group universe will consist of no more than 30 companies, and will take into account a company's publicly disclosed compensation benchmarking peers, as well as other peer companies disclosed by the subject company's self-disclosed peer group (with actual peer companies being chosen based on the "strength" of the relationships and connections between that universe of companies and the subject company).  It has also been reported that Glass Lewis will identify the peer companies used for evaluation purposes in their reports.

The model examines five financial indicators as measures of relative company performance (change in operating cash flow, EPS growth, total shareholder return, return on equity and return on assets) against relative three-year weighted average total compensation.  A weighted-average executive compensation percentile and a weighted-average performance percentile are compared to determine how closely compensation tracks relative performance. Companies with the largest "gap" are identified as having a poor pay for performance link, impacting the assigned performance grade A – F.

Given greater disclosure around the peer group methodology, companies will find it easier to determine likely Glass Lewis comparators and track the pay and performance relationship as Glass Lewis sees it.

On the ISS front, staff members recently solicited feedback from various executive compensation consulting firms and a handful of large public issuers regarding the second season of Say on Pay. The purpose was to gather feedback on the various issues and concerns echoed by corporate issuers during this past proxy season. It was no surprise that attendees had several complaints over ISS's newly revamped CEO Pay for Performance Policy and its underlying methodology (specifically, the lack of realizable pay analysis and shortcomings with the peer group construction methodology).

While ISS listened to advisor and issuer perspectives on the current CEO Pay for Performance peer group methodology and the merits of using realizable pay for CEO compensation evaluation purposes, ISS did state that it was unlikely that their Pay for Performance Policy would be subject to major revisions for the 2013 proxy season.  ISS had concerns and questions about being able to establish a uniform realizable pay analysis, and further that such an analysis could cut both ways (i.e., in some years such an approach may not be helpful or beneficial to an issuers pay for performance assessment). 

Overall, the tone suggested that ISS is open to making tweaks to its policies, but no significant overhaul is expected now or in the near future.

Future McLagan alerts will continue to monitor the ongoing impact of Say on Pay and changes in the way advisory firms determine their recommendations.

Appendix: Firms Included

Firms Industry 12/31/2011 Assets

JPMorgan Chase & Co.

Bank

2,265,792,000

Bank of America Corporation

Bank

2,129,046,000

Citigroup Inc.

Bank

1,873,878,000

Wells Fargo & Company

Bank

1,313,867,000

Goldman Sachs Group, Inc.

Broker/Dealer

923,225,000

Morgan Stanley

Broker/Dealer

749,898,000

U.S. Bancorp

Bank

340,122,000

Bank of New York Mellon Corporation

Bank

325,266,000

PNC Financial Services Group, Inc.

Bank

271,205,000

State Street Corporation

Bank

216,827,000

Capital One Financial Corporation

Bank

206,019,000

SunTrust Banks, Inc.

Bank

176,859,000

BB&T Corporation

Bank

174,579,000

Regions Financial Corporation

Bank

127,050,000

Fifth Third Bancorp

Bank

116,967,000

Northern Trust Corporation

Bank

100,223,700

KeyCorp

Bank

88,785,000

M&T Bank Corporation

Bank

77,924,287

Comerica Incorporated

Bank

61,008,000

Huntington Bancshares Incorporated

Bank

54,450,652

Zions Bancorporation

Bank

53,149,109

Hudson City Bancorp, Inc.

Thrift

45,355,885

Popular, Inc.

Bank

37,348,432

First Niagara Financial Group, Inc.

Bank

32,810,615

First Republic Bank (new)

Bank

27,791,801

People's United Financial, Inc.

Thrift

27,567,900

Synovus Financial Corp.

Bank

27,162,845

BOK Financial Corporation

Bank

25,493,946

First Horizon National Corporation

Bank

24,789,384

City National Corporation

Bank

23,666,291

East West Bancorp, Inc.

Bank

21,968,667

Associated Banc-Corp

Bank

21,924,217

First Citizens BancShares, Inc.

Bank

20,881,493

Commerce Bancshares, Inc.

Bank

20,649,367

Cullen/Frost Bankers, Inc.

Bank

20,317,245

SVB Financial Group

Bank

19,968,894

Hancock Holding Company (new)

Bank

19,774,096

TCF Financial Corporation

Bank

18,979,388

Webster Financial Corporation

Bank

18,714,340

Astoria Financial Corporation

Thrift

17,022,055

Fulton Financial Corporation

Bank

16,370,508

Wintrust Financial Corporation

Bank

15,893,808

Susquehanna Bancshares, Inc.

Bank

14,974,789

Signature Bank (new)

Bank

14,666,120

FirstMerit Corporation

Bank

14,441,702

Valley National Bancorp

Bank

14,244,507

Bank of Hawaii Corporation (new)

Bank

13,846,391

Washington Federal, Inc.

Thrift

13,649,716

UMB Financial Corporation (new)

Bank

13,541,398

PrivateBancorp, Inc. (new)

Bank

12,416,870


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