Schafer: Shareholder grumbling over TCF execs' pay is justified

Here's the way it's supposed to work — when shareholders in large numbers vote against the way you pay your executives, you change the way you pay your executives.

That clearly isn't the TCF way.

After waning support from shareholders over the past few years on TCF Financial's pay practices, the company's independent board of directors did nothing of substance to restore investor confidence.

The result of this thumb in the eye was utterly predictable, as holders representing nearly 73 million shares voted against TCF's executive compensation in the so-called "say on pay" advisory vote, or more than 54 percent of the stock that voted.

As is common when this vote goes against a company, the two big proxy advisory services firms, Glass, Lewis & Co. and Institutional Shareholder Services, both recommended that shareholders vote no. While both had serious complaints about the way TCF pays its executives, one could also detect frustration in their reports at how little seems to change.

"The continued lack of responsiveness calls into question the board's commitment to addressing shareholders' concerns," ISS noted.

Shareholder grumbling about TCF's executive pay goes back awhile. When shareholder advisory votes on compensation went into effect, the result for Wayzata-based TCF was support from 65 percent of shares in 2011, 76.5 percent in 2012, and then less than 62 percent at last year's annual meeting.

As these votes are not binding, there's a temptation to see an embarrassing no vote like TCF's as irrelevant to the real world of stock prices. That would be a mistake.

In the most recent report from Georgeson, a proxy solicitation firm, a look at 20 companies that last year lost these votes showed that they trailed their peers in total shareholder return over one-year, three-year and five-year periods.

That's why companies generally try to win shareholder support, so much so that it's exceedingly rare for a company to actually lose a vote.

So far this season, 83 percent of the Russell 3000 public companies received more than 90 percent support from their shareholders, according to the Semler Brossy Consulting Group. Just 1.3 percent of the companies got a result like TCF's.

Even 62 percent in favor of the board's pay practices should be a wake-up call that something has to be fixed. Last year, both TCF and Life Time Fitness, the fitness club operator, got that result. Only one of them actually did something about it.

The compensation committee then adjusted some of the corporate performance targets used for compensation and this year disclosed more details about a 2012 stock grant. It adopted such provisions as a "double trigger" on an executive's stock-based pay, meaning that if the company is ever acquired, the grants now immediately vest only if the new owner subsequently lets the executive go.

The compensation committee also rewrote its statement on how much it wants its CEO to make, compared with how much other companies pay. Its report once stated that CEO Bahram Akradi should be paid "at the highest levels of the highest-paid executives" among his peers, and now it just reads "appropriately rewarded, even when the target opportunity is greater than the opportunity of our peers' CEOs."

These changes were enough to persuade ISS to recommend "yes," and last week about 80 percent of Life Time's shares voted in favor of its pay proposal.

TCF didn't do any of these things Life Time did, although that's not to say it was completely uninterested in winning the vote. It wanted to win the argument that its practices were just fine as is.

In its talking points with shareholders, TCF said the 500,000-share grant made to longtime CEO William Cooper early this year was a "material inducement" to have Cooper stay as an employee through 2017.

But on the merits, it's far from clear TCF had a great case. The point that the proxy advisory firms made was that paying the maximum bonus of two times salary for officers is unusual, plus as ISS put it, the officers got those bonuses for meeting targets that "seem to lack rigor."

Also, Cooper will get his entire 500,000-share grant if the company only beats half of its peers on a return-on-assets measure, and he can even leave the company during the term.

Both firms point out how little changed from last year, as once again Glass Lewis said TCF earned an "F" for its pay program.

As for the company's effort to engage shareholders on the issue, ISS noted that the proxy statement said TCF's executives did talk to the fund managers that controlled 85 percent of the stock owned by institutions. It just didn't say whether they were ever asked about executive compensation.

Changing practices to win more support doesn't have to mean wholesale changes to a philosophy of paying executives. For Life Time it was a tweak, not a redesign. It wouldn't have been that hard for TCF to avoiding losing this vote.

So maybe by this time next year, TCF will win back some support. Its goal had better not be 51 percent.