Say-On-Pay: An Overview, and An Update

An Overview
The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in August of 2010 included a requirement that publicly traded companies provide shareholders with a non-binding vote to approve executive compensation plans. These non-binding votes are commonly referred to as “say-on-pay” measures.

In accordance with Dodd-Frank, the SEC’s implementing rule, effective January 5, 2011, requires large corporations to provide their shareholders with non-binding resolutions to approve the compensation for named executive officers at least once every three years. Because the resolutions are non-binding, a vote rejecting executive compensation does not have any necessary consequence. However, failed say-on-pay measures get the attention of corporate boards, and recent studies demonstrate that the non-binding resolutions have practical consequences.

An Update – Causes of Failed Measures
From January 2011-July 2011 there were 2,340 say-on-pay resolutions. Thirty-seven of these resolutions failed to acquire a supporting vote from a majority of shareholders. Another 37 resolutions had between 40% and 50% of the shareholders voting against the resolution. A September 2011 report sponsored by the Council of Institutional Investors analyzes what motivated investors to vote against these executive compensation plans. The report found that the top four causes were: (1) a disconnect between pay and performance (92% of respondents reported this was a factor); (2) poor pay practices (57% of respondents reported this was a factor); (3) poor disclosure (35% of respondents reported this was a factor); and inappropriately high level of compensation for the company’s size, industry, and performance (16% of respondents reported this was a factor).

An Update – Changes in Compensation Practices
Corporations are changing their compensation practices in reaction to say-on-pay resolutions. Clearbridge Compensation Group recently published a report which describes the compensation program changes implemented by the first 100 Fortune 500 companies subject to say-on-pay resolutions. This report found that program changes focused on three main areas: (1) minimizing non-performance based pay (including perks like Country Club memberships); (2) reinforcing shareholder alignment and/or enhancing the pay/performance orientation; and (3) improving disclosure to tell the pay-for-performance story.