The Power of Board-Shareholder Communication
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.