With myriad information and opinions hitting the papers and Internet every day about the ins and outs of “Say on Pay,” it seems helpful to summarize the most pressing issues and commentary (and a short summary this will not be).
The SEC adopted formal Say on Pay rules about a month ago, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Companies must conduct an initial vote on Say on Pay at their first regular meeting of shareholders occurring on or after January 21, 2011 (even if a company’s proxy statement was filed prior to January 21). Companies whose public investors hold less than $75 million of its outstanding shares are not required to hold such a vote until 2013. It’s important to note that the votes are advisory and not binding onto themselves.
In its most basic form, Say on Pay requires U.S. public companies to provide shareholders with the right to cast three types of advisory votes:
- Say on Pay: To approve the compensation of named executive officers;
- Frequency (a current hot button among public companies and their investors): To determine the frequency with which shareholders should be entitled to cast votes on the company’s executive compensation;
- Golden Parachute: To approve certain payments made in connection with an acquisition, merger or other specified corporate transaction.
As of the end of last year, 73 companies with shareholder meetings on or after January 21, 2011 had filed either preliminary or definitive proxy statements. Do these proxies provide trend information about how Say on Pay will play out?
Latham & Watkins says that 56% of the filed proxy statements have recommended a vote to approve compensation every three years; 23% have recommended annual votes; 11% have recommend a vote every two years; and the remaining 10% have not made a recommendation related to frequency. A Towers Watson survey of 135 U.S. public companies conducted in mid-December showed that 51% expected to hold annual say-on-pay votes; 39% preferred the vote be held every three years; and 10% anticipated holding a vote every two years.
Law firm Qashu & Schoenthaler LLP reviewed the voting results of 88 companies that had disclosed the results of their Say on Pay frequency votes as of February 22. While 55% of the directors at these companies recommended a vote every three years and 27% recommended a vote every year, only 29% of shareholders at these companies voiced their preference for vote every three years while 65% preferred every year. Sheppard Mullin also provides an excellent view into recent voting trends and practices.
My best guess is that investors will continue to press for annual votes, as they seek to gain more influence over how their companies should be run. Institutional Shareholder Services (ISS) supports this view and has a good FAQ on its compensation policies here. A recent MarketWatch article noted that the shareholders of Monsanto, Air Products and Chemicals, Jacobs Engineering and Woodward Inc. demonstrated a strong preference for future Say on Pay votes to be held each year, instead of management’s preference to hold the vote once every three years.
Towers Watson contends that there is “no single right answer to the question of how frequently these votes should be conducted that will work for every company. Each company seems to be assessing its own circumstances and needs, taking into account its specific shareholder composition and the degree of potential shareholder concern about the company’s executive pay programs.”
Towers Watson found that nearly half of those companies surveyed are making “some adjustments to their executive pay-setting process in preparing for the upcoming proxy season.” Those making these changes plan to devote more attention to explaining their programs, performing additional analyses on the link between executive pay and company performance, and/or considering changes to programs such as severance, change-in-control benefits and perks that have high visibility.
Advice from Latham & Watkins says that in preparation for these upcoming votes, companies may want poll their significant shareholders about desired frequency of Say on Pay votes. In fact, a recent Harvard Law School Forum on Corporate Governance and Financial Regulation informed that a group of institutional investors led by Walden Asset Management and representing more than $2.0 trillion in assets under management, has asked some companies to host an annual conference call specifically for institutional investors to focus on corporate governance discussions in the proxy statement. Whoa.
When deciding what is best for your company and its shareholders, consider the results of past votes on equity plans and director elections to determine the level of shareholder satisfaction on past executive compensation matters. It’s also a good idea to understand the voting guidelines of proxy advisors, such as ISS and Glass, Lewis, as well as your largest institutional shareholders.
Open and ongoing dialog is key to maintaining a best-in-class investor relations program, and whether it be Say on Pay or other issues facing your company, communicating honestly is the best recipe for success. Let us know how your company is thinking about Say on Pay.
— Laurie Berman, firstname.lastname@example.org