More than two years have passed since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. For publicly traded companies with more than $75 million in public float, this also signifies the passage of a second proxy season with shareholders delivering an advisory nonbinding vote on executive compensation (say-on-pay). So how did the 2012 say-on-pay vote measure up to the 2011 season and what issues should companies consider with next years proxy season?
Thus far, the number of companies reporting that a majority of their shareholders delivered a negative say-on-pay vote increased from less than 2 percent in 2011 to approximately 2.5 percent in 2012. While companies shareholders continue to deliver overwhelming support for existing pay practices, with more than 90 percent of companies passing with at least a 70 percent approval rate, the vote continues to be a high-profile issue. The majority of those companies with failed 2011 say-on-pay votes received passing scores in 2012, suggesting that companies acted upon the prior results and engaged shareholders effectively. However, the failure rate still increased, meaning that some that passed in 2011 failed in 2012. Thus, what are the new lessons to be learned from the 2012 proxy season?
CAUSE AND EFFECT OF SAY-ON-PAY
With Dodd-Frank, Congress intended to force corporate boards of directors and their compensation committees to focus on executive compensation practices through say-on-pay. Shareholder activism and public focus on the potential connection between risk taken by corporate executives and the design of compensation programs for such executives also paved the way for say-on-pay. At the highest level, it is fair to say that say-on-pay has caused corporate boards to focus more on executive compensation practices. The greater influence on the say-on-pay votes, however, has come from shareholder advisory firms, such as Institutional Shareholder Services and Glass Lewis Co., as well as the widespread attention given by the media to negative say-on-pay votes when they occur.
Approximately 9 percent of companies that received majority shareholder approval received such approval with less than 70 percent support. Advisory firms view the 70 percent threshold as one below which remedial action is required. As a result, companies continue to be spurred into action to modify their executive pay practices. Several of the companies that did not pass their 2011 say-on-pay vote indicated in their 2012 proxy that they had taken action to address their shareholders concerns and those of advisory firms. As a result, we may see more of these changes for the 2013 proxy season, including greater engagement of institutional shareholders and advisory firms, newly hired independent compensation consultants and implementation of significant changes to their pay structure and performance conditions.
