Learning From the Past

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On April 18th, slightly more than 52% of the FirstMerit shareholders rejected the bank’s say-on-pay proposal. This was the fifth pay plan voted down by shareholders this year. The reason for this rejection is not new: Shareholders claim a misalignment between pay and performance for the senior executives.

FirstMerit stated that the company’s “compensation policies and procedures…are imperative to align the compensation of the company’s named executive officers with [its] business goals and long-term success and that such compensation and incentives are designed to attract, retain and motivate the Company’s key executives.” This statement is identical to the one made in their proxy last year, which received majority shareholder support.

An article in the Wall Street Journal indicated that FirstMerit awarded $6.4 million in total compensation to its CEO in 2011, although its stock trended downward from early 2010 to late 2011. Last year, several companies that lost a say-on-pay vote also faced complaints of a pay for performance disconnect. For example, Jacobs Engineering raised executive compensation nearly 34 percent despite its one- and three-year shareholder returns being below the median of its peer group.

In response to a failed advisory vote, Jacobs Engineering chose to engage directly with shareholders and discuss the rationale for its compensation policies. In 2012, the effort paid off and Jacobs received majority support for its pay plans.

Beazer Homes also approached shareholders after they rejected the 2011 say-on-pay vote. According to the company’s 2012 proxy statement, the compensation committee directed management to “contact several major stockholders in order to better understand the reasons behind the [say-on-pay] vote outcome.” Additionally, the proxy lists the significant changes made to the compensation plan. In February 2012, Beazer Homes reported that the shareholders had overwhelmingly approved the revised compensation plan.

Failing a say-on-pay vote presents a challenge for boards. In some cases, shareholder outreach can provide valuable insights into investor concerns. Over the past year, Jacobs Engineering, Beazer Homes, and others have proved that this type of engagement can succeed.

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