The U.S. Shareholder Say-On-Pay Vote: What are the First Year Results?

Much the same as their contemporaries in Europe and Oceana, the U.S. public has expressed serious misgivings with high levels of executive compensation. However, it was not until 2010, when The Dodd-Frank Wall Street Reform and Consumer Protection Act ("DoddFrank") became law, that the U.S. joined other developed economies with say-on-pay legislation. Dodd-Frank includes Section 951, which requires that shareholders of publicly traded companies be able to cast advisory "say-on-pay" proxy votes (hereafter say-on-pay votes) on executive compensation packages. As of June 30, 2011, the first proxy season where voting was required, only 1.7 percent (37) of companies in the Russell 3000 rejected the proposed compensation package. There was only one firm that "failed" say-on-pay outside the Russell 3000. Conversely, 98.3 percent of companies "passed" their say-on-pay vote. Companies are also required to vote on how frequently shareholders should have say-on-pay votes (with four distinct choices concerning executive compensation). This decision was largely split: 54 percent were in favor of annual advisory votes and 41 percent in favor of triennial votes (with 2 percent voting for biennial frequency and 3 percent for no say-on-pay vote to be held). For those marginally performing firms, specifically those 5.7 percent of firms "passing" with less than 70 percent of shareholder votes (that is, less than 70 percent of their shareholders approved of the proposed executive compensation offering), as well as the 1.7 percent of firms that lost their say-on-pay votes in 2011, management should be particularly motivated to actively communicate, and develop dialogue, with proxy advisors, institutional investors, and other major shareholders to better understand their policy concerns and resolve any executive compensation issues before their subsequent say-on-pay vote takes place. It will be critical for these firms to have effective pay-for-performance alignment in the design and implementation of their executive compensation policies, including the elimination of any problematic pay practices.