What They’re Still Sayin’ about Payin’

Say on Pay

Photo credit: Flickr, Tind

With proxy season nearly upon us, a couple of thoughts may be in order about Say on Pay, one year after
we first blogged about these new guidelines going into effect.
On the positive side, last year nearly all companies had their executive pay plans approved by at least a majority of their shareholders, according to a recent research report from IR Insight in a survey of 181 companies.  Moreover, the vast majority of the companies received a “yes” vote from 70 percent or more of their shareholders on their executive pay plans.
With only two companies surveyed receiving a majority of “no” votes, Say on Pay is nevertheless not lessening in importance.
“Egregious pay packages are by and large a thing of the past,” according to Robin Ferracone, a consultant with Farient Advisors, an independent executive compensation firm.  Ferracone believes that investors were “forgiving” last year.  She said institutional investors are set to grade companies’ pay plans “a lot harder” in 2012, although if companies’ performances and the markets improve, investors may not question executive pay much at all.
Narrowly approved pay plans may not be out of the woods.  Modest changes to the investor base could put these companies in jeopardy of receiving enough “no” votes to reject the pay plan.  Executive compensation experts advise corporate secretaries and investor relations officers to contact top holders at these companies to learn about investor concerns, and either explain the purpose of the questionable provisions, or modify the plan.
Going forward, the expectation is investors will more closely scrutinize how executive pay is
determined.  They want to see companies disclose how they have appropriately aligned performance with pay.  Ferracone believes this means more use of objective criteria, benchmarking and third-party diagnostic tools.
Finally, the SEC has delayed until the second half of 2012 the final rules on a number of pay disclosures under the Dodd-Frank Act.  Ira Kay, managing director at Pay Governance, a firm that provides independent executive compensation advice to boards, says the “pay versus performance” disclosure rules are difficult to craft, and the SEC may get ideas from companies tackling the issue on their own.  We’ll soon see.



What the Pundits are Sayin’ about Payin’

Value for Money

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.  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,

Dodd-Frank Act Defined for Public Companies

With more than a month since the Dodd-Frank Act was approved and signed in to law by President Obama, the interpretative dust is beginning to settle.
According to Skadden Arps, The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 affects almost every aspect of the U.S. financial services industry.  Its goal is to restore public confidence in the financial system and prevent another financial meltdown.  Put simply, it significantly increases regulation.
But, from a practical standpoint, what does it really mean?
Among other things, regulators will have the authority to take control of and liquidate troubled financial firms if their failure would “pose a significant risk to the financial stability of the United States.”  The Federal Reserve will have the authority to extend credit in “unusual and exigent circumstances.”
Most important from a public company standpoint, the SEC’s enforcement program will be enhanced, disclosure of executive compensation will become mandatory, and shareholders will have the right to a “say-on-pay” vote on executive compensation.
SEC Enforcement
New SEC enforcement programs will effectively “increase the flow of enforcement tips from potentially knowledgeable insiders.”  Skadden Arps recommends “robust compliance and self-evaluative programs for all entities that are subject to SEC regulation.”  The Act also expands the SEC’s authority to bring enforcement actions against those who aid and abet violations of the securities laws.
Corporate Governance
One likely outcome of the Dodd-Frank Act is increased contesting of annual director elections.  Activist investors will have more leverage to pressure companies to take short-term-focused actions rather than allow boards to focus on the long term.  Skadden Arps notes that this could keep qualified directors from continuing to serve on public company boards.  In keeping with PondelWilkinson’sview of investor communications, public companies should work to increase engagement with shareholders now, to develop and maintain long-term, mutually beneficial relationships.
Cravath, Swaine & Moore notes that public companies will also need to disclose in their annual proxy statements the reasons why the positions of chief executive officer and chairman are filled by the same person or by different people (although the SEC has already adopted rules requiring this disclosure).  In a follow on to last year’s New York Stock Exchange ruling, which eliminated broker discretionary voting with regard to director elections, the Act also prohibits broker discretionary voting with regard to shareholder votes on executive compensation matters.
Executive Compensation (Say on Pay)
During a recent speech, SEC Chairman Mary L. Schapiro said that investors’ “concerns must be addressed to fully modernize our system and ensure that our markets continue to foster capital formation and serve as an efficient engine for turning savings into jobs and economic growth.  And, I believe that the recently-enacted regulatory modernization legislation goes a long way to addressing them.”


Laurie Berman,