AGENDA

Boards Get Ahead of Say-on-Pay Legislation   

Article published on November 9, 2009
By Kristin Gribben

A majority of corporate directors are taking action in anticipation of a say-on-pay policy at their companies. A “wait and see” approach isn’t proactive enough, many directors say, according to a recent Agenda survey.

Twenty-nine percent of corporate directors are planning for say on pay by keeping themselves informed of the latest developments, while an almost equal number, 28.5%, say they are focused on making sure there are no perceived poor pay practices if and when Congress mandates say on pay.

Only 2.3% responded that they are doing nothing to prepare, underscoring the concern and sense of imminence about the measure.

The statistics are based on the results of Agenda’s “Directors and Officers Outlook: Q4” survey, which was conducted between Oct. 21 and Nov. 4.

Meanwhile, 13.8% said they are preparing for say on pay by communicating with shareholders, 10.8% are reworking or improving disclosure and 6.2% are focusing on retention. (For complete results please see chart.)

James Taranik, a longtime director at Newmont Mining and engineering professor at the University of Nevada, says his board has been planning for say on pay by beefing up disclosure in the proxy statement in a way that speaks directly to shareholders. “There was a conscious decision by the full board to ask the compensation committee to go ahead and prepare that material… and encourage the company to put that on the website.”

At Newmont’s board meeting a couple weeks ago, the full board had a complete review of where its compensation stands in relation to the other companies in the manufacturing and mining industry, with an eye toward say on pay and other pending regulatory and legislatively mandated changes.

There is fear among some directors that say on pay is a slippery slope toward pay caps, prompting some to take defensive action now.

That fear has been fueled by CEO salary caps in place for TARP recipients and compensation restrictions issued by Special Master Kenneth Feinberg for the seven “exceptional” TARP companies.

“Maybe this is the time to stop and say, ‘This is the time to plan something,’” says Palomar Medical Technologies Chairman Dan Valente, who is also a director at MKS Instruments and Medical Information Technology. If Congress passes say on pay and boards sit back and wait for it to happen, it will be too late to thwart unwanted consequences of legislation, he says.

Pay caps are a worry for Valente, whose boards are already brainstorming ways to avoid any onerous legislation. Retention is a key concern, he says. Some of his boards have considered a bylaw amendment that would ensure executives are entitled to their salary and bonus despite any law change or a negative shareholder vote.

“Maybe we need bylaws that say, say on pay can’t cause a cut in the senior executive’s salary,” he says.

Voluntary Adoption

While only 7.7% of respondents to the Agenda survey said they are planning to adopt their own policy or already have, several large companies in the past couple of months have added their names to the growing list of issuers that have voluntarily adopted the measure.

Some companies have said they adopted it because they are confident in their pay practices and have nothing to worry about. Others adopted say on pay under pressure from shareholders. Most recently, a small handful of firms adopted a modified version of the annual vote Congress is considering.

Microsoft adopted a triennial say-on-pay policy in September, and Prudential Financial and Pfizer adopted biennial versions last month. Susan Wetzel, chair of the Employee Benefits and Executive Compensation practice group at Haynes and Boone, says some companies are adopting modified versions of say on pay in hopes that “maybe if we all just agree to do it, it won’t happen from Congress.”

It could be a smart move. Triennial or biennial say on pay would be a less costly option for issuers, and some shareholders argue it would be easier for them to thoroughly cast a vote on compensation if that vote didn’t take place every year. However, Wetzel notes that this strategy may backfire. “I don’t know if that philosophy will actually work because our legislators seem to be pretty hot on say on pay,” she says. (For legislative developments please see sidebar.)

Benefiting From Say on Pay?

Some experts say the fear and uncertainty circling in boardrooms about say on pay is overblown. In fact, some optimistic scenarios would have companies benefiting from say on pay. First, say on pay in the U.K. has been heralded by some as promoting more dialogue between boards and management that has resulted in a more collegial atmosphere. Second, if — and some say when — another financial crisis hits and shareholders try to pin executive pay as part of the problem, companies whose shareholders ratified their pay packages will have a clear defense.

On the other hand, at companies whose shareholders vote against the pay packages, boards will likely be under pressure to act. While say on pay gives nonbinding authority to shareholders, if comp committee members refuse to make changes to compensation, they could be targets of a no-vote campaign against their re-election at the following annual meeting, Wetzel says.

A say-on-pay mandate would also hit the pocketbooks of small companies the hardest. Some small companies have only one in-house attorney, so they would have to contract out for legal guidance, Wetzel says.

It would also put more work on the board, says Newmont Mining’s Taranik. Compensation disclosure requirements are already extensive, and under an SEC proposal, companies might be forced to spend more money to comply.

Wetzel says the best advice for directors in preparing for say on pay is do an audit of how the compensation committee comes to its pay decisions.

“Redirect your focus to the goals of the company before deciding executive comp,” she says. “If you want to give executives a bonus, ask what the bonus is intended to achieve and diversify your goals so that the sole goal is not just to build up the stock price.”

She suggests comp committee members should receive training at least once a year to make sure they understand what their duties are to shareholders and go through ethical dilemmas boards may face.

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