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Hewlett-Packard is the Latest Company to Lose a Say-on-Pay Vote

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

March 27, 2011

It’s a case of “Nay-on-Pay”, as Paul Hodgson described it in his post on The Corporate Library Blog, “Hewlett-Packard latest company to feel the heat of a Say on Pay defeat.” At its annual meeting last week, Hewlett-Packard became the fourth public company this year to lose a Say-on-Pay vote, now required under the Dodd-Frank Act, with 50 percent of the shares voting against the resolution and 48 percent voting yes. The no votes have also outnumbered the yes votes at Shuffle Master, Beazer Homes USA and Jacobs Engineering Group, as reported in Ted Allen’s post on ISS’s RiskMetrics Blog, “Investors Reject H-P’s Pay Practices.”

These latter three companies are quite a bit smaller than H-P, and at least two of them had fairly obvious “red flag” issues. Shuffle Master had a CEO severance agreement with a “single-trigger” provision, as described in Allen’s post. Beazer Homes has been faced with shareholder lawsuits over its compensation practices and was the subject of a successful “clawback” proceeding, as described in this Bloomberg article by Jef Feeley and David Beasley, “Beazer Homes Directors Sued by Teamsters Funds Over Executive Compensation.”

On the other hand, the lost Say-on-Pay vote at huge H-P, ranked number 10 in the Fortune 500, is sure to get the attention of corporate America. This may be the public company equivalent of Kansas losing today to Virginia Commonwealth in the NCAA Men’s Basketball Regional Finals. H-P did not have such obvious compensation red flags, and it certainly had the resources to mount a vigorous communications campaign. However, Allen’s post cites several aspects of H-P’s compensation that could not have made large shareholders happy, and which resulted in ISS’s recommendation against the resolution:

[New CEO Leo] Apotheker's pay arrangements include substantial up-front signing awards of cash and stock, and severance provisions that would result in sizeable payouts--including automatic vesting of all his time-based equity--upon his termination without cause. Many aspects of the company's incentive programs are subject to board discretion as well, and depend on the board exercising its authority objectively--e.g., the granting of discretionary bonuses and approval of higher-than-median pay benchmarking. The company has paid substantial discretionary awards and does not disclose goals for the key metrics that drive payouts under its annual and long-term plans, even retrospectively. Without complete disclosure, shareholders cannot ascertain the rigor of the goals relative to payouts.

Allen also points out that the company had provided “generous severance payouts after the board ousted former chief executives Mark Hurd and Carly Fiorina.” The Bloomberg article also reports that ISS cited Apotheker’s participation in selecting new board members, which it deemed “inappropriate.”

H-P’s compensation committee will need to communicate with shareholders to determine the cause or causes of the lost vote and deal with them in the coming year. Likewise, other companies’ boards should try to learn lessons from the defeat at such a high profile company. 


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