by Gwen Moritz
Posted 7/21/2014 12:00 am
Updated 5 months ago
In some ways, the “say on pay” requirement included in the Dodd-Frank Wall Street Reform Act of 2010 seems to be a routine exercise in rubberstamping.
Say-on-pay votes are not binding in the first place, and the vast majority pass — that is, stockholders representing a majority of outstanding shares vote to approve the executive compensation formulas presented by the compensation committee of the company’s board of directors.
As of June 25, when Semler Brossy Consulting Group of Los Angeles issued its most recent roundup of say-on-pay vote results, executive pay failed to get 50 percent approval in only 48 of 2,123 companies — 2.3 percent — and the average approval rate was 91 percent.
But say on pay is having an impact even for companies whose compensation packages get voter approval, and a perfect example is in Little Rock: Bank of the Ozarks Inc.
Last month, BOZ informed the Securities & Exchange Commission that it was making changes to the executive compensation program that had been approved at its May 19 annual shareholders meeting because the vote in favor had dropped from 97 percent and 96 percent in 2012 and 2013 to 64 percent this year.
BOZ executives and directors on the compensation committee blamed the dramatic drop in support to “the preferences of governance and proxy advisory firms for more performance based compensation.” That’s a dry way of saying that certain companies, one of them being Institutional Shareholder Services Inc. of New York, had encouraged their institutional investor clients to vote no on Bank of the Ozarks’ say-on-pay ballot item.
Starting with the current quarter, which began July 1, BOZ executives will have more of their compensation, both cash incentives and restricted stock awards, tied to the achievement of specific performance goals.
American Banker took note of BOZ’s response to the say-on-pay vote, particularly since “Bank of the Ozarks has been one of the top-performing community banks in recent years, enjoying a 160% rise in its stock price since 2011,” reporter Chris Cumming wrote.
But Joseph Sorrentino, a managing director with Stephen Hall & Partners, an executive compensation consulting firm in New York, said the issue is less about a particular company and more about “best practices” — and who decides what those are.
Proxy advisers issue proprietary recommendations on how clients — primarily institutional investors — should vote on proposals included in annual proxy reports. ISS, with more than 700 employees in 10 countries, is the 800-pound gorilla of the industry, and Bank of the Ozarks’ former pay package was among the 13 percent that it has recommended against during 2014, according to Semler Brossy’s research.
(The Wall Street Journal reported in May that another Arkansas company, Wal-Mart Stores Inc. of Bentonville, had been criticized by ISS for, among other things, “a string of adjustments to pay targets and plans that together have the effect of insulating executives’ pay somewhat from the consequences of Wal-Mart’s declining performance.”)
ISS declined to comment for this story, but it did share its proprietary report recommending a vote against Bank of the Ozarks’ executive compensation plan:
“A vote AGAINST this proposal is warranted,” ISS concluded. “CEO pay has remained significantly higher than the peer group median over the previous three years and continues to lack performance-based elements in either the annual or equity incentive plan. Consecutive years of substantial base salary increases have further ratcheted the non performance-based elements upwards. The year-over-year increase in total CEO pay may manifest some alignment with stock price improvements, but shareholders should be concerned that the CEO’s equity awards continue to be entirely time-based, lacking a rigorous link to key performance drivers beyond stock price influences.”
There is tension between compensation consultants and proxy advisers, especially since say-on-pay votes became a routine part of each proxy season. Advising big investors to adopt its views on executive compensation has been part of what Sorrentino has described as “mission creep” by ISS.
What ISS Likes
ISS has clear preferences for executive compensation strategies, as Bank of the Ozarks found out, and Sorrentino said those preferences tend to be rigid regardless of the company or its particular situation.
“We don’t see the world quite as black and white,” Sorrentino said of his company, Stephen Hall & Partners. “You want to be able to have some flexibility.”
Sorrentino described the ISS philosophy on executive pay as both quantitative — how much executives are paid — and qualitative — how that compensation figure is determined.
Quantitatively, ISS compares executive compensation to that of peer companies and to the returns that investors have enjoyed. Qualitatively, ISS and other proxy advisers prefer performance-based compensation like stock awards that vest when certain financial goals are reached rather than after a certain amount of time.
Almost needless to say, the proxy advisers don’t like things like “golden parachute” severance packages that are sometimes described as “pay to fail,” Sorrentino said.
Through spokeswoman Susan Blair, Bank of the Ozarks declined to make any comment on the compensation change other than what was included in its SEC filing. But Sorrentino said it’s not surprising that the company’s compensation committee would respond promptly to a say-on-pay vote result like BOZ’s.
“The challenge has been in many cases [ISS has] taken the role of determining the quote-unquote best practices, and many companies follow those practices … because they want to get a positive vote from ISS,” Sorrentino said.
Bank of the Ozarks has been expanding — the recent acquisitions of Omnibank of Houston and Summit Bank of Arkadelphia have pushed its assets to $6.3 billion. Bigger companies have more to lose if they don’t respond to the votes of their institutional investors.
“There’s a whole lot of reputational risk, and the directors are working a whole lot harder than they ever have,” Sorrentino said. “It’s not the country club job that everyone thought it used to be.”