The Power of Board-Shareholder Communication

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Earlier this week, the Wall Street Journal reported that Jacobs Engineering passed a crucial test of its executive compensation plan. According to Jacobs, about 82% of the shareholders voted in favor of the executive compensation plan listed in the 2012 proxy. Jacobs Engineering became national news last year for being one of the first companies to have failed its say-on-pay vote.

Last year, Jacobs’ compensation plan received a negative vote of 53.7%; only 44.8% supported it. At that time, Jacobs’ board claimed the “executive compensation program has been designed to promote a performance-based culture and align the interests of executives with those of shareholders by linking a substantial portion of compensation to the Company’s performance.” The majority of shareholders disagreed. Instead, the opposition shareholders argued that the negative vote was a direct result of pay for performance troubles. According to Ted Allen from Institutional Shareholder Services (ISS), total CEO compensation rose by 33.7% despite the company’s one and three year TSRs being below the median of its peer group. Additionally, a primary concern was the granting of $2.1 million in stock awards when none was provided in 2009 or 2008.

Knowing that a second failed say-on-pay vote was not an option, Jacobs revised their compensation plan for the 2012 proxy. According to the company’s proxy, members of the compensation committee met with institutional shareholders “in order to better understand the reasons for the negative vote.” Additionally, the vote proposal in the 2012 proxy materials doubled in length and clearly identified the features added to the compensation plan.

Total compensation in 2011 for Jacobs’ CEO, Craig Martin, fell by nearly 9% since 2010. The committee altered the package by using performance-based market stock units (MSU) instead of the time-based restricted stock grants used in the 2010 equity compensation program. This change, as well as a handful of others, was enough to satisfy the investors who had voted against Jacobs’ plan the year prior.

Ultimately, the Jacobs Engineering story will serve as a reminder of the benefits of shareholder dialogue. In this case, Jacobs was able to explain their compensation story to the shareholders and adjust their plans accordingly. Other companies looking to avoid potential challenges to their compensation plans should communicate proactively and reach out to their shareholders.

2 Comments

  • dn says:

    In my experience and opinion, it really depends on the circumstance. In a situation where you have obvious misalignment and bad behavior, first, you get your comp committee to do the right thing, then you communicate. Jacobs is an example. The guy and the company are not performing. Why is he being rewarded disproportionately? In other cases, ISS or GL may not like aspects of your plan, and so they give “vote no” guidance. You may have very good reasons for the component, but they don’t care, because they are not interested in dialogue. In the case of ISS, they would love to have you pay them to “consult” for you to device a policy that they will approve. WHAT A SCAM! GL will not do that, to their credit.

    I speak with many institutional investors. Many of them have a group, disconnected from the people making the investing decision, who are in charge of paying attention to ISS and GL proclamations, and advising the fund managers. If GL tells them to vote no, they tell the portfolio manager, who almost always/always votes no. It has no influence on their investing decision if they actually have an informed reason for holding the stock. Very few investors that I know make investing decisions based on compensation policies. Again, well intended regulation doing nothing to actually influence how a company is run, but definitely creating lots of work for consulatants and giving comp committees plenty of distractions, and therefore CEO’s and CFO’s plenty of distractions. Kind of sad and silly really, but definitely reflective of our over regulated cover your butt society, in my opinion.

  • Proactive dialogue with large Institutional investors cannot be emphasized enough in a world of Dodd-Frank compliance to avoid proxy wars. Studies are indicating scheduling time to inquire feedback on Strategy is becoming Business as Usual (BAU) for Board members. Follow me on twitter @yusuf_11