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Published: Sunday, 5/25/2014 - Updated: 3 months ago

With vote, shareholders get a chance to voice opinion on CEO compensation packages

BY TYREL LINKHORN
BLADE BUSINESS WRITER

Health Care REIT revamped several parts of its executive compensation program last year after shareholders just barely approved the company’s “say-on-pay” proposal at the 2013 annual meeting.

A provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act, say-on-pay was meant to give shareholders a chance to voice their opinions on compensation packages for a company’s top executives, which some saw as rising too quickly and often without merit.

The provision went into effect in 2011.

Though it has made big news when shareholders vote down proposals — Chipotle shareholders made waves earlier this month when they overwhelmingly rejected the restaurant chain’s compensation package — generally the proposals have passed by wide margins.

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According to Semler Brossy Consulting Group, just 2.5 percent of companies’ say-on-pay proposals failed in 2013, while 91 percent of companies passed with more than 70 percent approval.

That’s led some to say the votes, already nonbinding advisory actions, are nearly useless.

Not so, argues Todd Sirras, the managing director at Semler Brossy.

“Votes that are below expectations create real change,” Mr. Sirras said. “The first thing they create is a lot of discussion, not only internally but among shareholders or proxy advisory groups. In many cases it creates meaningful changes in the programs over time.”

At Toledo‘s Health Care REIT, shareholders went from a 95 percent approval in 2011 to just barely approving the company’s compensation package last year with 50.03 percent of the vote.

“We were caught off guard a little bit,” said Steven Schroeder, who is the vice president of finance for Health Care REIT.

In response to the vote, the company instituted an extensive shareholder-outreach program where members of the board and later the company’s executive-compensation committee met with shareholders representing about 38 percent of Health Care REIT’s outstanding shares to collect feedback and suggestions.

“Those meetings drove certain changes to our compensation plan,” Mr. Schroeder said.

“One of the main changes was to initiate this forward-looking, long-term incentive plan,” Mr. Schroeder added.

The company instituted a three-year, long-term incentive plan that includes 10 separate performance metrics, including dividend growth.

The long-term incentive plan also is now based solely on the performance of the company.

Previously, there were individual performance criteria as well.

Health Care REIT also increased the rigor of its cash-bonus program, and the company did away with a retention payment that presented chief executive officer George Chapman with $1 million worth of stock annually.

Mr. Chapman retired last month after becoming chief executive officer in 1996.

The company also made changes to its annual proxy report in an effort to make it more easily understood by shareholders and others.

Shareholders appeared to be pleased by the changes. At the 2014 annual meeting earlier this month, the compensation package was approved by 85 percent of shareholders.

“It’s an advisory vote, so it’s not binding, but it’s like having disapproval from your parents,” Mr. Sirras said. “It doesn’t feel good. It’s kind of embarrassing.”

Though executive pay continues to rise, Mr. Sirras said discussions in today’s boardrooms are different than they were before say on pay, with directors focusing much more on how shareholders will react to their decisions.

“Those conversations occur on a daily basis now, and they influence the ultimate decisions and the ultimate levels people are getting paid,” Mr. Sirras said.

At Health Care REIT, the company’s compensation committee has committed to continue its outreach program going forward.



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