Which Way on
Say-on-Pay?
How
companies plan to hear shareholder opinions on compensation.
April 1, 2010
While they are not yet mandatory, and
won't be until 2011 at the earliest, say-on-pay provisions are nonetheless
being adopted by a growing number of companies. In 2008 a mere 6 companies
voted to give shareholders an advisory vote on executive compensation; at
press time, 56 planned to put the matter up for vote this year or next,
according to a tally by corporate-governance advisory firm RiskMetrics
Group.
Exactly which form of say-on-pay to put
up for vote, however, remains a matter of debate. The basic model is to
ask for an annual yes or no vote in the proxy. But some companies,
including General Mills, Prudential, and Microsoft, offer votes every
second or third year, in part to align with the timing of long-term
incentive packages. Others, like financial services firm MBIA, ask about
CEO compensation separately from compensation for other executives. Still
others, like Amgen, Lockheed Martin, and Northrop Grumman, don't offer a
formal vote but solicit opinions on various facets of their compensation
programs through shareholder surveys.
While say-on-pay votes would be
nonbinding, Maureen Thompson, executive director of investor advocacy
group Shareowners.org, says such votes will "make board compensation
committees more careful about doling out rich rewards to underperforming
CEOs."
One thing is clear: whichever approach a
company takes won't please everyone. Paul Hodgson, senior research
associate at The Corporate Library, a governance monitoring firm, believes
that a binary vote is sufficient, since shareholders can make it clear
through the annual meeting what they object to, but that such votes should
be held every year. Otherwise, he says, "the year a company doesn't have a
vote could be the year it tries to slide something through that it knows
shareholders would not approve of."
Others, including Arthur Kohn, a partner
in law firm Cleary Gottleib's executive-compensation practice, are
advising clients to aim for every third year. "Companies have a very hard
time understanding what the message means in the first place: Are
shareholders reacting to particular elements of the packages, the overall
compensation philosophy, or something else entirely?" Kohn asks
rhetorically. "Having the vote every three years virtually dictates it be
a vote on compensation philosophy" rather than non-pay-related management
issues.
Companies that have yet to put the issue
on their dockets may be well advised to initiate or continue informal
dialogues with shareholders. Mandatory annual say-on-pay was included in
the bill that Sen. Christopher Dodd (D–Conn.) unveiled last month, and it
closely echoes a bill that passed the House of Representatives last year.
The good news for companies? So far, shareholders have approved virtually
every compensation package that has come up for a vote, usually by a
strong majority.
![Companies that moved to offer shareholders an advisory note on executive pay in the past 6 months](http://media.cfo.com/images/1004NewsP12.gif)
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