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This year marked the first time that shareholders wielded a stamp of approval on executive compensation—a Dodd-Frank financial reform mandate that raised the specter of the unknown for many a public company. But one of the big surprises of 2011 may be just how well corporate America fared in this first test of the new system. A new report by GMI Ratings counts 157 companies in the Russell 3000 and 42 companies in the S&P 500 that garnered less than 70 percent shareholder approval for executive pay packages. It complements another report [PDF] by GMI that examined eight S&P 500 companies that failed altogether to win majority approval for executive pay. “I would have thought that there would have been more failures the first time around,” says GMI research associate Greg Ruel, who authored GMI’s Say on Pay Review: Potential Say on Pay Failures for 2012 [PDF]. “But never having seen this before, it was hard to tell how the first vote would play out.” Paul Lapides, director of the Corporate Governance Center in the Coles College of Business at Kennesaw State University, concurs: “Overall, the results were incredibly positive in terms of shareholder support for pay,” he says. “It worked out a lot better than I think people had excepted was possible.” Yet for those corporations that squeezed by with passing marks, the report, says Ruel, functions as “a watch list of companies that haven’t failed, but could fail” to get shareholder approval for pay packages. These companies should be engaging shareholders and changing compensation policies to reverse those trends, Ruel says: “There’s got to be some active dialogue between companies and shareholders.” Companies that failed say-on-pay votes in 2011 “by and large had several compensation policy issues which led to the unsuccessful votes,” the report states. “These companies also did very little to address objectionable policy prior to the annual meeting.” For those companies who didn’t meet the 70-percent approval threshold: “Winning a nominal majority of support by shareholders should not be seen by corporations as a ringing endorsement of executive pay plans,” the report cautions. “Active involvement with company shareholders and implementation of policies that improve value to shareholders may reverse the direction of declining pay plan support.” Advising the board and the chief executive to consider those points of view often falls to the general counsel, says Lapides, who sits on the board of directors at EasyLink Services International Corp. and Sun Communities, Inc. Though that can be an uncomfortable task, he adds. “It’s hard to say to the board and to the CEO sometimes, ‘Hey, we could do this a lot better, and we ought to look at that.’ “ And while Lapides says the alignment between pay and company performance will never be perfect, coming up with a package that “makes sense” tends to lead to more effective employees and content shareholders. “Shareholders are going to be happier, management is going to be happier, and the employee is going to be happy if the structure makes more sense,” he says. The companies that got the highest approval rates from shareholders were also high performers in their industries, says Ruel. “A lot of it comes down to how the stock price is doing,” he says. Shareholders become upset—and dissatisfied with compensation policy—when the stock price is down, “and the CEO’s making out well, and they’re not.”

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