“Say on Pay” at the Bay Area Tech 120 – A First Look at 2017
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Now that the summer is reaching its conclusion, it’s time to take a look at this year’s results for the non-binding shareholder advisory vote on the compensation of a company’s named executive officers (the so-called “Say-on-Pay Vote”) required by Section 14A of the Securities Exchange Act of 1934 (as added by the Dodd-Frank Wall Street Reform and Consumer Protection Act). So far, 2017 has been notable for the high number of companies that have received over 90% support for their say-on-Pay proposal (75%) and the fact that no companies have failed the vote this year.
As we have done since 2011, Compensia has been monitoring the Say-on-Pay Vote results for the most prominent technology companies headquartered in the San Francisco Bay Area (primarily in Silicon Valley). We call this group, which consist of prominent companies in the computer/hardware, internet/software, and semiconductor sectors, the Bay Area Tech 120. (The companies comprising the Bay Area Tech 120 are listed on the Exhibit to this article.)
This Thoughtful Pay Alert summarizes our findings as of August 20, 2017, based on the results of their 2017 annual meeting of shareholders as disclosed by the Bay Area Tech 120 companies. These results are reflected in the Exchange Act reports of these companies as filed with the Securities and Exchange Commission. We intend to update this report at the end of the year to report our findings for annual meetings of shareholders conducted this fall.
Four Things That Technology Companies Should Know About the 2017 Say-on-Pay and Say-on-Frequency Votes
- To date, support for executive compensation programs has been wholly favorable. For the first time since we began tracking Say-on-Pay Votes, all of the Bay Area Tech 120 companies that have held their 2017 Annual Meeting of Shareholders as of the middle of the year have seen their shareholders approve the compensation of their named executive officers. To date, no companies have yet experienced a failed Say-on-Pay Vote.
- Level of support is consistent with prior years’ support levels. The average level of support among the Bay Area Tech 120 companies that have held their 2017 Annual Meeting of Shareholders has been 91.3% (compared to 91.7% support in the Russell 3000). Similarly, shareholder support for the Bay Area Tech 120 companies that have held their seventh Say-on-Pay vote this year has been slightly higher, coming in at nearly 93.2%.
- Dramatic Vote Fluctuations Continue to be Possible. Even with the relative year-over-year stability seen from most companies, shareholder support for a Say-on-Pay proposal can change almost overnight. To date, three Bay Area Tech 120 companies that received more than 85% support in 2016 saw this support drop by at least 30% in 2017. Similarly, two Bay Area Tech 120 companies that received less than 55% support in 2016 saw support increase by an average of just over 43% in 2017.
- Virtually All Companies Holding Say-on-Frequency Vote Will Conduct Future Say-on-Pay Votes on an Annual Basis. With the exception of Google, each of the Bay Area Tech 120 companies that has conducted a Say-on-Frequency Vote in 2017 has seen its shareholders express a preference for holding future Say-on-Pay Votes on an annual basis (including three companies that held triennial Say-on-Pay Votes in the past). Google’s shareholders have indicated that they are satisfied with triennial Say-on-Pay Votes.
As of August 20, 2017, 82 of the companies in the Bay Area Tech 120 (68.3%) had held their 2017 annual meeting of shareholders and reported the results of the various votes conducted at the meeting. Of these companies, 72 conducted a Say-on-Pay Vote at the meeting. (The remaining 10 companies have either decided to hold their Say-on-Pay Vote on a triennial basis (four companies) and, therefore, held no vote in 2017 or qualified as “emerging growth companies” as established under the Jumpstart Our Business Startups (“JOBS”) Act (six companies) which are not required to conduct a Say-on-Pay vote.)
Of the 72 companies holding Say-on-Pay Votes in 2017, two companies held their first shareholder advisory vote on executive pay (Go Pro and Pure Storage), 10 companies held their second shareholder advisory vote on executive pay (Arista Networks, Box, FireEye, Gigamon, PayPal, Qualsys, RingCentral, Square, Twitter, and Zendesk), seven companies held their third shareholder advisory vote on executive pay (Ambarella, Google, Immersion, Inphi, Servicenow, Super Micro Computer, and Workday), one company held its fourth shareholder advisory vote on executive pay (Imperva), two companies held their fifth shareholder advisory vote on executive pay (Splunk and Yelp), and four companies held their sixth third shareholder advisory vote on executive pay (Dolby Laboratories, Ellie Mae, Sanmina, and Zynga). The remaining 46 companies held their seventh Say-on-Pay Vote.
2017 Say-on-Pay Results
Average Level of Support
Overall, the average level of support for the 72 Bay Area Tech 120 companies conducting Say-on-Pay Votes so far in 2017 has been 91.3%. In the case of the 46 companies which held their seventh Say-on-Pay Vote in 2017, average support was nearly 92.3%, compared to 90.5% average support for the same group of companies in 2016, 89.1% average support in 2015, 88.6% average support in 2014, 84.7% average support in 2013, 87.4% average support in 2012, and 91.4% average support in 2011 – a relatively consistent result (with a slight (5.0 – 6.0%) dip in the middle of this period).
Actual Level of Support
The actual support for the 72 Bay Area Tech 120 companies conducting Say-on-Pay Votes so far in 2017 has been as follows:
While the decided majority of companies continue to receive strong support for the compensation of their named executive officers in 2017, it is notable that 42 of these companies received 95% or more support from their shareholders, including eight companies that received near unanimous approval of the executive compensation program with 99% or more of the votes cast on the Say-on-Pay proposal voted in favor of the proposal.
Unsuccessful Say-on-Pay Proposals
To date this year, none of the Bay Area Tech 120 companies have failed to receive a majority of the votes cast in favor of their Say-on-Pay proposal.
Year-Over-Year Vote Fluctuations
Of the 46 companies that have now held seven votes, 23 received more support (an average of 10.8%, with a median increase of 5.1%) in 2017 compared to 2016, while 22 saw support for their executive compensation program decline (by an average of 5.9%, with a median decrease of 1.8%). One company (VMware) received the same level of support in 2016 and 2017.
As has been the case each year, a handful of companies have experienced a significant vote swing on the Say-on-Pay proposal between 2016 and 2017. So far, five companies have seen support for their executive compensation program increase by over 20% in a single year, while five companies have seen their support drop by over 20% in a single year (including two companies where support declined by over 30% and one company where support dropped by over 45%).
Most of Companies That Received Less Than 70% Support in 2016 Improved Significantly in 2017
Interestingly, four of the five companies that received less than 70% support in 2016 which have held their Annual Meetings experienced a significant increase in support in 2017; typically, by an average of 39.4%. For example, Verifone Systems, which failed the Say-on-Pay Vote in 2016, improved the support for its named executive officer compensation from 44.8% to 92.0% in 2017 – an increase of over 47%.
Most Companies that Received More Than 90% Support in 2016 Remained Stable in 2017
As in prior years, a number of the Bay Area Tech 120 companies 27 that received more than 90% support in 2016 saw support for their executive compensation program decline in 2017. The average amount of this decline 7.7% was largely influenced by the fact that one company experienced a decrease in excess of 35% while a second company saw a decrease in excess of 45%.
Just as notable, 22 of the Bay Area Tech 120 companies that received 90% or more support in 2016 actually saw this support increase in 2017 (by an average of 2.4%) – a truly remarkable result given the limited amount of room to garner additional votes in favor of their executive compensation program. Further, of the companies that saw support for their Say-on-Pay proposal decrease in 2017, the decline for 11 of these companies was 2.0% or less).
2017 was the year for the second round of the non-binding shareholder advisory votes on the frequency of future shareholder advisory votes on the compensation of a company’s named executive officers (the so-called “Say-on-Frequency Vote”). Companies are required to conduct a Say-on-Frequency Vote at least once every six years. Thus, for companies that held their first Say-on-Pay Vote and Say-on-Frequency Vote in 2011, this year was the time for soliciting input from shareholders in whether to conduct future Say-on-Pay Votes every one, two, or three years.
Of the 52 companies holding a Say-on-Frequency Vote in 2017, 48 saw their Board of Directors recommend that future Say-on-Pay Votes be held annually. Two companies (Google and Super Micro Computers) saw their Board of Directors recommend a triennial Say-on-Pay vote and at two companies (Coherent and Electronic Arts) the Board made no recommendation on a vote frequency.
In every case except one (Google), shareholders expressed a preference that future Say-on-Pay Votes be held every year. In the case of Google, the Board of Directors recommended and shareholders supported a triennial Say-on-Pay Vote. At Super Micro Computers, while the Board of Directors recommended that future Say-on-Pay Votes be held every three years, shareholder voted in favor of annual votes.
As in prior years, the experience of the Bay Area Tech 120 companies with the Say-on-Pay Vote continues to past experience. It continues to be notable that for the two-thirds of the Bay Area Tech 120 that already have held their annual meeting of shareholders, the vote was largely a non-event. Further, for the companies that have now held seven Say-on-Pay Votes, support for their executive compensation program has (with just a few exceptions) largely remained strong year-over–year, as reflected by their average annual support at or above the 90th percentile.
As long as a technology company’s financial performance (as measured by total shareholder return) is in the top half of its industry sector, and absent a specific problematic compensation decision or policy, it’s unusual to encounter any significant issues in obtaining majority support for its executive compensation program. Of course, maintaining an effective shareholder engagement program is an important part of this process. By identifying potential concerns well in advance, technology companies should be able to address these matters before they ripen into a full-fledged problem and jeopardize the outcome of your Say-on-Pay Vote.
Compensia has extensive experience in helping companies draft the executive compensation disclosure in the proxy materials for their annual meetings of shareholders and analyze the potential impact on the shareholder advisory vote on named executive officer compensation. If you would like assistance in preparing your executive compensation disclosure for your Say-on-Pay Vote, or if you have any questions on the subjects addressed in this Thoughtful Pay Alert, please feel free to contact Mark A. Borges.