Our Thoughts on Key Issues  Vol. 5  Issue 1
Is “Say on Pay” All About Performance?
Research Indicates Link between TSR and Vote Outcomes Is Weakening
By Yonat Assayag, Andrew Cipolaro, and Jacob Moy
Introduction
Since the introduction of “Say on Pay” in 2011, requiring publicly-traded companies to hold a non-binding
shareholder vote on executive compensation, there has been a great deal of discussion regarding the
influence of strong company performance in securing successful Say-on-Pay vote outcomes. In order to
assess whether Say on Pay is really all about performance, ClearBridge Compensation Group
(“ClearBridge”) analyzed the relationship between company performance and Say-on-Pay vote outcomes
®
among S&P 500 companies over the past three years.
Key Findings

Directional alignment between Total Shareholder Return (“TSR”) and Say-on-Pay vote outcomes
indicates shareholders are considering performance when casting Say-on-Pay votes

Strongest correlations between TSR and Say-on-Pay vote outcomes result from measuring TSR
over a multi-year period

Over time, Say-on-Pay vote outcomes have become less correlated with TSR, implying shareholders
have increased their focus on other factors when casting Say-on-Pay votes
Methodology
1
ClearBridge analyzed company performance and Say-on-Pay vote outcomes from annual shareholder
®
2
meetings held in 2011, 2012, and 2013 among S&P 500 companies .
3
To assess performance, we calculated each company’s TSR through its fiscal year end immediately prior to
each annual shareholder meeting. TSR was measured three ways:

1-year TSR

3-year compound annual TSR

Average of 1- and 3-year compound annual TSR
Each company’s TSR was then ranked versus the TSR calculated for all other companies to generate
relative TSR rankings for each of the time periods analyzed.
In order to analyze the relationship between relative TSR and Say-on-Pay vote outcomes, we conducted two
assessments:
1
Say-on-Pay vote outcomes calculated according to each company’s publicly-disclosed calculation methodology
Represents constituents of the S&P 500® Index as of December 31, 2013
3
Total Shareholder Return (“TSR”) is defined as stock price appreciation including reinvestment of dividends
2
ClearBridge Compensation Group  CLEARthinking  Vol. 5  Issue 1

Analyzed relative TSR performance for companies receiving less than 70% support on Say on Pay,
which is generally considered a low level of support.

Analyzed the correlation between relative TSR performance and Say-on-Pay vote outcomes for all
®
S&P 500 companies to quantify the directionality and strength of the relationship. Directionality is
measured as positive or negative, with positive indicating the variables move in the same direction
and negative indicating the variables move in opposite directions. Strength is measured between 0%
and 100%, with 0% indicating no relationship and 100% indicating a perfect relationship.
Relationship between Performance and Say-on-Pay Vote Outcomes
Relative TSR Performance among Companies with “Low Levels” of Say-on-Pay Support
Bottom-quartile performers consistently account for the greatest portion of companies receiving less than
70% support, as shown in Exhibit 1. This finding demonstrates directional alignment between TSR and Sayon-Pay vote outcomes, as companies with low levels of support are most often the weakest performers.
Interestingly, there has been a shift over time in the relative performance of companies receiving less than
th
70% support. In all the TSR scenarios analyzed for 2013, TSR performers below the 50 percentile
constitute a smaller portion of the companies receiving low levels of support than in prior years. This trend
suggests that Say on Pay is becoming less about performance, as the percentage of companies receiving
less than 70% support is becoming more balanced between strong and weak performers.
Exhibit 1: Distribution of Companies with <70% Say-on-Pay Support by Relative TSR Performance Quartile
1-Year
TSR Measurement
3-Year
TSR Measurement
11%
11%
17%
7%
16%
25%
16%
20%
14%
13%
14%
Avg. of 1- & 3-Year
TSR Measurements
9%
22%
≥75th Percentile (Top Quartile)
11%
17%
50th-74th Percentile
20%
25%
16%
30%
25%
20%
17%
25th-49th Percentile
18%
29%
<25th Percentile (Bottom Quartile)
17%
8%
11%
50%
55%
55%
59%
47%
47%
45%
44%
39%
2011
Relative TSR Performance Quartile:
2012
2013
2011
2012
2013
2011
2
2012
2013
ClearBridge Compensation Group  CLEARthinking  Vol. 5  Issue 1
Correlation between Relative TSR and Say-on-Pay Vote Outcomes for S&P 500® Companies
As reflected in Exhibit 2 below, the correlation between performance and Say-on-Pay vote outcomes is
positive for all scenarios analyzed. Positive correlations indicate Say-on-Pay support decreases as relative
TSR decreases and support increases as relative TSR increases, which implies shareholders are likely
considering company performance in evaluating Say-on-Pay proposals.
In addition, as emphasized by the blue circles in Exhibit 2, the strongest correlation in each year results from
3-year TSR measurement, or the average of 1- and 3-year TSR measurements. Conversely, the weakest
correlation in each year results from 1-year TSR measurement. Stronger correlations from multi-year
performance periods indicate shareholders are likely more focused on longer-term performance.
The analysis also indicates the weakest correlations occur in 2013, which are highlighted in blue in Exhibit 2
below. This finding suggests that while a relationship between TSR and Say-on-Pay vote outcomes still
exists, it is weakening over time.
Exhibit 2: Correlations between Relative TSR and Say-on-Pay Vote Outcomes
2011
TSR Performance Measurement
2012
2013
Correlation between Relative TSR and Say-on-Pay
Vote Outcomes for S&P 500® Companies
1-Year TSR Measurement
23.2%
23.0%
11.2%
3-Year TSR Measurement
29.5%
25.3%
17.1%
Avg. of 1- & 3-Year TSR Measurements
28.3%
28.2%
15.2%
Companies have enhanced their proxy disclosure and increased their direct shareholder engagement over
time, which has allowed them to effectively describe their pay programs, how their compensation plans
support their business strategy, and how alternative definitions of pay such as realizable pay are aligned with
company performance. The weakening relationship between TSR and Say-on-Pay vote outcomes may be a
result of shareholders considering this additional context.
In addition, institutional shareholders have continued to refine their approaches for assessing Say-on-Pay
proposals to ensure robust reviews of compensation policies and practices in addition to company
performance. Therefore, the weakening relationship over time between TSR and Say-on-Pay vote outcomes
may also be driven by the evolution of institutional shareholders’ voting policies.
Relationship between Performance and ISS’ Vote Recommendations
Given shareholder advisory groups’ role of providing Say-on-Pay vote recommendations, we also analyzed
®
the relationship between relative TSR and ISS’ vote recommendations for all S&P 500 companies.
3
ClearBridge Compensation Group  CLEARthinking  Vol. 5  Issue 1
Similar to the findings from Exhibit 2, correlations between TSR and ISS’ Say-on-Pay vote recommendations
are consistently positive (see Exhibit 3 below). This indicates that companies with weaker TSR more
commonly receive “against” vote recommendations from ISS and companies with stronger TSR more
commonly receive “for” vote recommendations. ISS’ quantitative pay-for-performance tests, which are more
likely to be passed by companies with stronger relative TSR performance, may be driving this result.
Also similar to the trend in vote results, correlations between TSR and ISS’ Say-on-Pay vote
recommendations are weakest in 2013. The weakening relationship is consistent with ISS’ proxy voting
policies, which have evolved to supplement objective pay-for-performance criteria with more subjective
factors relating to compensation design.
Particularly noteworthy is that the strongest correlation in every year results from the average of 1- and 3year TSR measurements, as emphasized by the blue circles in Exhibit 3. (This contrasts with the strongest
correlation between TSR and Say-on-Pay vote outcomes, which resulted from a 3-year TSR measurement in
some years.) ISS’ Relative Degree of Alignment (“RDA”) test, which historically calculated the alignment
between pay and TSR performance over the weighted average of a 1- and 3-year period, is likely causing
this outcome. With ISS’ change to the RDA test for 2014 to cover a 3-year period only, we may expect to see
the correlation based on 3-year TSR become the strongest in future years.
Exhibit 3: Correlations between Relative TSR and ISS’ Say-on-Pay Vote Recommendations
2011
TSR Performance Measurement
2012
2013
Correlation between TSR and ISS' Say-on-Pay Vote
Recommendations for S&P 500® Companies
1-Year TSR Measurement
18.8%
16.2%
8.8%
3-Year TSR Measurement
20.9%
17.1%
9.4%
Avg. of 1- & 3-Year TSR Measurements
21.0%
19.6%
10.1%
Conclusion
This research and analysis indicates that while there is a link between TSR and Say-on-Pay vote outcomes,
especially over the longer-term, the strength of the relationship is weakening over time. This trend implies
that shareholders are conducting robust reviews of executive compensation programs that consider many
other relevant factors in addition to company performance.
Recognizing that TSR is not the sole input considered by shareholders casting their Say-on-Pay votes,
companies should continue to review their compensation programs for factors that are likely to influence their
vote outcomes. Potential areas of concern include misalignment between pay and performance and
problematic non-performance-based pay practices (e.g., excessive perquisites and tax gross-ups).
Companies should also review the appropriateness and rigor of their incentive plan performance measures
and goals and ensure their compensation programs effectively align with shareholder interests.
4
ClearBridge Compensation Group  CLEARthinking  Vol. 5  Issue 1
ClearBridge Compensation Group is an independent consulting firm providing advice to boards of
directors and senior management on the design of effective executive and incentive compensation programs
with a focus on alignment with shareholders, linkage with business strategy, and adherence to strong
governance standards.
Our consultants have extensive experience and expertise in executive compensation program design. Our
work spans across industries for both publicly-traded and privately-held companies. Our aim is to establish
transparent connections between management and shareholders and understandable links between
performance and compensation.
We provide an array of compensation services to meet the individual needs of our clients. A sample of our
consulting services includes:
Total Compensation Review and Design
Annual Incentive Design
Long-term Incentive Design
Performance Measurement
Board of Director Compensation
Stock Ownership Programs
Employment Agreements
Severance / Change in Control Arrangements
Compensation Governance Review™
Proxy / Say on Pay Preparation
Corporate Transactions (e.g., M&A, Spin-offs, etc.)
This report was authored by Yonat Assayag, Andrew Cipolaro, and Jacob Moy. For questions specific to this
CLEARthinking, or for more information on ClearBridge Compensation Group or any of the services outlined
above, please visit our website or contact our New York City office at:
515 Madison Avenue
32nd Floor
New York, NY 10022
212-886-1022
www.clearbridgecomp.com
5