Qualys Stockholders Sound Alarm On Company's Executive Compensation In Highly Unusual Rebuke

Stockholders at Qualys have taken the extremely rare step of publicly objecting to the compensation given to the company's top five executives in 2017.

During Qualys' annual meeting Monday, only 35.5 percent of shares voted in favor of the cloud security vendor's executive compensation plan, with 55.9 percent of shares opposed to an arrangement that resulted in more than $36 million of stock awards being granted to Qualys' top five executives in 2017. That included more than $22 million going to company Chairman, President and CEO Philippe Courtot alone.

Some 8.6 percent of Qualys shares were broker non-votes on the compensation proposal (which typically occurs when investors are going through an intermediary and haven't provided instructions on how to vote), while just 0.05 percent of shares abstained from the vote. The company's revenue climbed by 17 percent in 2017 to $230.8 million, while GAAP net income leapfrogged by 110.4 percent to $40.4 million.

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"To the extent there is any significant vote against the compensation of our named executive officers … we will endeavor to … better understand the concerns that influenced the vote, consider our stockholders' concerns and our compensation committee will evaluate whether any actions are necessary to address those concerns," Qualys said in an April 27 proxy statement filing with the U.S. Securities and Exchange Commission (SEC).

Qualys did not immediately respond to a request for additional information. The result of the vote was announced after the market closed Tuesday, and Qualys' stock remained unchanged at $96.20 in pre-market trading Wednesday.

The executive compensation vote is non-binding, meaning that Qualys is not forced or compelled to take any specific action.

Still, it is incredibly rare for advisory executive compensation votes to fail, with just 2.1 percent (32 of 1,498) of Russell 3000 companies having their compensation proposals rejected so far this year, according to a June 6 analysis from executive compensation consulting firm Semler Brossy. The Russell 3000 tracks the performance of the 3,000 largest U.S.-traded stocks.

On average, 90.8 percent of votes have been cast in favor of a company's executive compensation plan in 2018, with 92 percent of proposals receiving approval from at least 70 percent of the recorded votes, according to Semler Brossy. Executive compensation proposals for public companies in the United States have been subject to an advisory vote since the July 2010 passage of the Dodd-Frank Act.

This year's rejection of Qualys' executive compensation plan was a dramatic departure from 2017, when more than 96 percent of the votes cast approved of the compensation plan for Qualys' named executive officers. Qualys' 2016 executive compensation plan, though – which was voted on during the company's 2017 annual meeting – contained just $3.2 million of stock awards for the firm's top five executives.

The lopsided 2018 rejection of the executive compensation plan occurred despite 18.6 percent of Qualys' shares being owned by the company's directors and current executive officers. Courtot – who started as CEO in 2001, two years after the company's founding - is Qualys' largest investor, holding 15.5 percent of all outstanding shares.

Other stockholders with more than a 5 percent stake in Qualys include: New York-based investment management firm BlackRock, which holds a 10.2 percent position in the company; New York-based asset management firm Neuberger Berman, which holds a 7.2 percent stake; and Malvern, Penn.-based investment advisory firm The Vanguard Group, which holds a 5.9 percent position in Qualys.

Qualys' compensation committee in April 2017 reviewed compensation data for the company's self-determined peer group, which includes businesses such as Barracuda Networks, FireEye, Gigamon, Imperva, Palo Alto Networks, Proofpoint, Rapid7 and Splunk, according to the proxy filing with the SEC.

In the course of that review, the committee determined that the value of the equity awards granted to CEO Courtot, Chief Commercial Officer Amer Deeba, and Chief Product Officer Sumedh Thakar over the previous three years hadn't been competitive with the equity awards handed out by peer companies.

As a result, Qualys' compensation committee recommended that the board of directors grant $7.5 million of 'catch-up' restricted stock unit awards to those three executives that were scheduled to vest over just a one-year period.

The independent members of Qualys' board of directors in April 2017 approved both the 'catch-up' awards as well as $12.8 million of refresh stock awards scheduled to vest over a four-year period.

Qualys then decided to move the allocating of refresh stock awards for the 2018 fiscal year up to October 2017 so that the equity awards could be factored into Wall Street guidance regarding the company's stock. The size of the refresh awards was reduced to reflect the portions of the 'catch-up' awards that still remained unvested.

Even with the reduction, Qualys' independent directors ended up approving an additional $14.6 million of restricted stock unit awards for the company's top executives in October 2017.

All told, the median annual total compensation in 2017 for Qualys' 868 full-time, part-time and temporary employees other than Courtot was $39,047. Courtot's total annual compensation for 2017 came in at $22.7 million, or 582.6 times greater than the median compensation earned by Qualys employees other than himself, according to the company's proxy filing with the SEC.