SAY-ON-PAY

Final Rule 14a-21(a) requires each public company to include in its proxy statement a separate shareholder advisory vote to approve or disapprove the compensation of the company’s NEO’s as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, the compensation tables and other narrative executive compensation disclosures. The required vote is a “yes” or “no” indication on the entirety of the NEO compensation arrangements described in the proxy statement. Compensation of directors is not required to be included in the vote. It is worth noting that Riskmetrics has recommended votes against approximately 15% of the proxies filed so far in 2011, and of those companies only two have failed Say-on-Pay shareholder votes (Jacobs Engineering and Beazer Homes).

Key Take-away: Say-on-Pay requires companies to address in their proxy statement’s “Compensation Discussion and Analysis” (CD&A) section whether and how they took into account the results of the say-on-pay vote.

SAY-ON-FREQUENCY

Under final Rule 14a-21(b), public companies are required to include in their proxy statements a separate shareholder advisory vote to indicate the frequency of future votes on the compensation of executives preferred by the shareholders. Shareholders must be given four choices (annual, biennial, triennial, or abstain). As of March 15, 2011 approximately 55% of early filers prefer annual, 6% biennial and 39% triennial. This is a shift from earlier results of 40% annual, 8% biennial and 52% triennial (March 1, 2011).

Key Take-away: L&A recommends Companies provide a recommendation to shareholders for votes on a triennial basis. Triennial voting is consistent with longer term compensation awards and planning, allows institutions to provide “thoughtful” votes and the majority of institutional shareholders already vote with their stock. HOWEVER, if a company’s majority shareholders follow RiskMetric’s voting guidelines, the Company may consider recommending an annual say-on-pay vote.

CLAWBACKS

The Dodd-Frank Act includes a requirement that all public companies have a clawback policy for incentive compensation paid to executive officers. The clawback applies to all executive officers, not just the CEO and CFO as under the Sarbanes-Oxley Act. Dodd-Frank further expands the reach of mandatory recoupment policies. Under the Act, the SEC will direct the national securities exchanges and national securities associations to amend their listing standards to require that every listed company adopt a compensation recovery policy containing two key components: 1) Companies must provide disclosure of clawback policies for any incentive-based compensation that was paid out based on erroneous financial information reported under securities laws; 2) Companies must seek repayment from any current or former executive officer of any incentive-based compensation (including stock options) paid during the three-year period preceding the “date that the company is required to prepare the accounting restatement” that was based on the erroneous data.

Key Take-away: The final provisions of clawbacks have yet to be determined. The SEC is expected to provide final guidance by the second quarter of 2011.

CHANGE OF CONTROL

The Dodd-Frank Act requires a tabular disclosure of the compensation arrangements covered by the new rules that is somewhat different from, and more extensive than, the narrative disclosure of change-in-control and post-termination arrangements currently required under paragraph (j) Item 402 of Regulation S-K. The new tabular disclosure must quantify for each NEO the following: Cash severance payments; Accelerated stock awards; accelerated vesting option awards; payments made in cancellation of stock and option awards; Pension and nonqualified deferred compensation benefit enhancements; perquisites; tax gross-ups; any other benefits; and the aggregate of all such compensation.

Key Take-away: The new rules also require additional narrative disclosure of the following: any material conditions or obligations applicable to the receipt of payment (including non-compete and non-solicitation agreements, their duration, and provisions regarding waiver or breach); a description of the specific circumstances that would trigger payment (whether lump sum or annual, their duration, and who would provide the payments); and any material factors regarding each agreement.

CEO PAY VS. MEDIAN EMPLOYEE

Companies must disclose the median annual total compensation of all employees under the CEO, the annual total compensation of the CEO, and the ratio of the median employee total compensation to the CEO total compensation. In 2007, CEOs in the S&P 500, averaged $10.5 million annually, 344 times the pay of typical American workers, but that was a steep drop in the ratio from 2000 when CEOs earned 525 times average pay.

Key Take-away: Final rules regarding the calculation of the total compensation as well as which employees are to be included in the calculation, have not been determined. This disclosure is not required for the 2011 proxy season, and many question the utility of such a calculation.

PAY FOR PERFORMANCE

The single most important factor in “getting to yes” in Say-on-Pay votes will be demonstrating the link between pay and performance. This must be done in the “Compensation Discussion and Analysis” (CD&A) disclosure in the proxy statement. It will be important to craft the summary section of CD&A carefully. The section should summarize the pay for performance link. In this first proxy season involving mandatory Say-on-Pay, advisory services such as Riskmetrics, as well as institutional investors, will be scrambling to sort out the practices of many companies in a short time. Issuers will want to make it easy for investors to determine quickly that the company has sound pay practices.

Key Take-away: The Dodd-Frank Act will require a “Pay for Performance” disclosure in the proxy statement. However, the enabling regulations won’t be adopted until April – July 2011, and the table will likely not be in effect until the 2012 proxy statement for most companies. Experts speculate that the table will be based on a total shareholder return (TSR) measure.

IT’S early in the US proxy season, but it looks as if shareholders are set to give directors a stern rebuke on at least one of the two say-on-pay items that are on annual meeting ballots this year.

As reported in this article by contributor Vanessa Schoenthaler of Qashu & Schoenthaler yesterday, shareholders are voting against the recommendations of directors in many say-on-frequency votes, which are meant to advise boards on how often shareowners want to vote on executive compensation.

While directors are mostly recommending that say-on-pay votes be held only every 3 years, shareholders are defying them and mostly voting for annual advisory votes. (continue reading… )

It has now been one month since shareholders were able to render advisory votes on the executive compensation provided at their publicly-held companies in accordance with rules adopted by the Securities and Exchange Commission (“SEC”) in January 2011 (“Say-On-Pay”). These rules were promulgated under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”).  Our January 28, 2011 blog “Some Interesting New Developments as SEC Adopts Final Say-On-Pay Rules” provides an overview of the applicable rules and requirements. Of the seventy-six Say-On-Pay votes which have been reported on to-date, the shareholders at two companies have voted against approving the executive compensation.

One element of the Say-On-Pay rules is that shareholders also get to vote on how frequently the Say-on-Pay vote will be conducted at their company (“Say-On-Frequency”). In particular, shareholders can provide an advisory vote that states their wishes as to whether the Say-on-Pay vote should occur every one, two or three years. In soliciting the Say-On-Frequency vote, a company’s board of directors can provide its recommendation (or it can provide no recommendation) as to which frequency it believes shareholders should support.

As we recently reported in our February 1, 2011 blog “A Rising Tide for Annual Vote Say-On-Pay Votes“), there was an initial trend developing which indicated that shareholders preferred annual Say-On-Frequency. While it continues to be early in the Say-On-Pay process since the SEC’s final rules have only been in effect for one month and there have been only just over seventy-five votes to-date, these initial voting results do indeed continue to demonstrate a shareholder preference for annual Say-On-Pay votes (as opposed to biennial or triennial voting). The annual frequency has received the most shareholder votes at 65% of the companies that have reported on their Say-On-Frequency votes.  This preference for annual voting is particularly evident with respect to those companies which are “Large Accelerated Filers”, as such term is defined under SEC rules (i.e., public companies with a market value of at least $700 million), with the shareholders at over 84% of such companies supporting annual voting. (continue reading… )

As public companies and shareholders gear up for the first big wave of SEC-required advisory votes on executive compensation, the frequency of such votes and golden parachute compensation plans in the wake of the Dodd-Frank Act, the search goes on for best practices and advice.

In the past couple of months, there has not been a shortage of both as law firms, compensation consultants, and corporate governance education centers or think tanks. For those of you who need a refresher on the three Say on Pay-related votes this year, here they are:

• Say on Pay: A non-binding, advisory shareholder vote on the compensation plans of the top executives of a public company. Starting with annual meetings after Jan. 21, 2011, companies must include a description of the compensation plan in the Compensation Discussion & Analysis (CD&A) section of the proxy statement that serves as a platform for explaining the compensation programs’ logic. The frequency of the vote, which is determined separately by shareholders, cannot be more than triennial.
• Say When on Pay: Again, a non-binding, advisory shareholder vote on the frequency of the Say on Pay vote to be held at least once every six years. Shareholders are to be asked if they favor a vote every year, two years, three years or abstaining.
• Golden Parachutes: A non-binding, advisory shareholder vote on the compensation package of the top executives when a change in control would trigger the severance clause in a executive’s contract with the company. Some of the more controversial elements of some golden parachute plans include excise tax gross-ups, large bonuses, stock options and high severance payments. (continue  reading… )

Shareholders can now vote on the salaries of executives leading publicly traded companies. The Dodd-Frank Act reforming the financial industry included the Say on Pay guideline, which was okayed Wednesday by the Federal Trade Commission. As a nonbinding statute, businesses don’t have to adhere to the outcomes of Say on Pay votes, however industry insiders predict the dynamic between executives and shareholders will be substantially impacted. Really, this ought to keep individuals from getting huge payday loans to pay for the top executive’s paychecks. Post resource – New Say on Pay rule gives shareholders vote on CEO compensation by MoneyBlogNewz.

Investors obtain a say on CEO pay

Because of the executive compensation packages taking place along with the rank-and-file wages, the Dodd-Frank Act was passed in 2010 with the Say on Pay guideline proposed. Around January 21, the first annual shareholders’ meeting is held. The top-level salaries are voted on once every three years be shareholders with this. Any companies with stock worth $75 million or less will have to deal with the Say on Pay guideline. Jan 2013 is when this will begin. The Say on Pay rule was approved by a 3-2 vote by the commission along partisan lines. Republican commissioners voted no, saying that smaller businesses should be permanently exempt.

A huge pay day for CEOs

Because of the executive and employee pay that has been ridiculous in the past few decades, the Say on Pay provision was added to the Dodd-Frank Act. Many of the public policy groups explained that a CEO of a publicly traded company makes a ton more than the average worker on salary. It’s about 300 times more in fact. CEOs made about 30 times more a generation ago. Corporate executives are free to ignore the vote, but it is likely they’ll keep away from the embarrassment of investors openly expressing their negative opinions about them.

Public companies in United States have a new era ahead

The Say on Pay provision is also expected to give investors more influence with corporate executives on other issues. The rule makes it so annual accounts have to be made by the company. In these, the response to shareholder votes has to be included. If they choose to disregard the vote, they have to explain why. This is the way that the U.K. has been doing things for year. In fact, there has been a vote on executive pay for quite some time. Many analysts expect the U.S. will evolve to resemble that system, wherein executive pay packages are negotiated in advance with shareholders before they are put to a vote.

Citations

Market Watch

marketwatch.com/story/sec-approves-investor-say-on-ceo-pay-2011-01-25?pagenumber=2

BNET

bnet.com/blog/business-news/investors-get-say-on-pay-what-will-they-do-with-it/3965

Daily Finance

dailyfinance.com/story/investing/sec-gives-investors-a-vote-on-executive-pay-golden-parachutes/19814998/

• The new rules specify that say-on-pay votes required under the Dodd-Frank Act must occur at least once every three years beginning with the first annual shareholders’ meeting taking place on or after Jan. 21, 2011.
• Companies also are required to hold a “frequency” vote at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. Following the frequency vote, a company must disclose on an SEC Form 8-K how often it will hold the say-on-pay vote.
• Under the SEC’s new rules, companies also are required to provide additional disclosure regarding “golden parachute” compensation arrangements with certain executive officers in connection with merger transactions.
• The Commission also adopted a temporary exemption for smaller reporting companies (public float of less than $75 million). These smaller companies are not required to conduct say-on-pay and frequency votes until annual meetings occurring on or after Jan. 21, 2013.  “Public Float” is typically defined as the portion of a company’s outstanding shares that is in the hands of public investors, as opposed to company officers, directors, or controlling-interest investors.

For further details see http://www.sec.gov/news/press/2011/2011-25.htm.

CCBE will be monitoring the impact of US Say on Pay closely in coming years.

The SEC has posted the meeting notice on its website, which outlines the items to be discussed.

TheCorporateCounsel.net plans to cover the outcome of the meeting during its upcoming webcast: “The Latest Developments: Your Upcoming Proxy Disclosures – What You Need to Do Now!” 

Do you think the SEC is really going to adopt these Say on Pay rules on Tuesday, as well as redefine ‘accredited investor’ and impose reporting obligations on investment advisors to private funds? How comprehensive will these reporting obligations be, and will advisors be encouraged or required to use a standard framework such as the GRI?

Dodd-Frank and Proposed Say on Pay Vote Rules

On October 18, 2010, the Securities and Exchange Commission (SEC) published proposed rules (Proposed Rules) implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). Section 951 generally requires US public companies to provide their shareholders the right to cast three types of pay votes: (i) a vote to approve the compensation of the named executive officers (say on pay vote); (ii) a vote on the frequency with which shareholders should be entitled to cast votes on the company’s executive compensation (frequency vote) and (iii) a vote to approve certain payments made in connection with an acquisition, merger or other specified corporate transaction (golden parachute vote). As of this date, the SEC has not adopted any final rules on the say on pay votes, but they are expected any day.

This Commentary provides a brief overview of the Proposed Rules and their effective dates, the current institutional and public company say on pay trends and what companies should be doing now to prepare for their 2011 say on pay votes. For a more detailed overview of the Proposed Rules, please see our Client Alert: SEC Announces Preliminary Say on Pay Rules, dated November 4, 2010.

Bottom Lines

The bottom lines are that US public companies are generally required to hold say on pay and frequency votes at their first meetings of shareholders occurring on or after January 21, 2011. Public companies are not required to hold golden parachute votes until the SEC promulgates the final rules. The SEC expects to issue the final rules between January and March of 2011. Until that time, public companies holding shareholder meetings on or after January 21, 2011 are only required to hold say on pay and frequency votes. Public companies may, however, ultimately avoid a golden parachute vote if they properly disclose their golden parachute arrangements and subject them to a general say on pay vote, provided that the arrangement is not modified after its prior approval. (continue reading… )

According to a notice published Monday, Canada’s largest regulator is reviewing whether securities regulators should introduce mandatory “say-on-pay” requirements. In addition, staff at the OSC are weighing the “appropriateness” of regulatory requirements that would mandate the election of directors individually and by majority vote.

Canada’s largest companies already employ some of these corporate governance tactics, but regulators have found there tends to be less uptake at smaller firms.

The OSC will be accepting comments from interested parties until March 31, and anticipates further consultation with regulators and the public.

In its review, the OSC is looking at whether additional reforms are needed in the proxy voting system, and to what extent this should be addressed by regulators.

Stikeman Elliott’s Canadian Securities Law Blog has more.

The Fund seeks to engage and invest in all of Australia’s top 200 companies in the hopes of enhancing their climate change and ESG activities. The Fund believes that by helping these companies perform better on their climate change issues, their share value will increase and in turn increase the value of the Fund.

Not employing sustainability screens is antithetical to traditional socially responsible funds. Further, it would against their nature to invest in companies they don’t plan to own. There are some historical precedents, such as religious-affiliated funds or funds that seek to support specific causes. In the U.S. a large portion of all proxy initiatives are sponsored by religious organizations – leading these initiatives is the Interfaith Centre on Corporate Responsibility (ICCR). In 2010 ICCR members filed 282 shareholder resolutions on ESG issues.

Other successes socially responsible funds have had is in engaging companies and regulatory authorities regarding ‘say on pay’; where stockholders vote on executive compensation. Further, together with the public outcry, socically responsible funds have moved the government and the SEC to act on ‘say on pay’.

These funds are also looking to take another issue to the US Chamber of Commerce – corporate political donations. According to alrroya.com, A press release dated November 4 states, “investors today announced the filing of shareholder resolutions at several corporations that sit on the Board of the US Chamber of Commerce, challenging their corporate boards to review their policies and oversight of political expenditures, especially through trade associations. The first four companies to receive this resolution are Accenture, IBM, Pepsi and Pfizer.”

This article certainly shows great strides for socially responsible funds and investors. Do you think this is a sign of the times? Are we on the road to this being a societal norm, that SR funds will hold much weight in the regulatory environment? Discuss!

The first U.S. proxy statements with a mandatory “say on pay” vote and a separate vote on the frequency of future votes were filed on Monday and provide an early look at how companies will address “say when on pay” votes during the 2011 proxy season. Under the Dodd-Frank Act, companies must hold an advisory vote on compensation at their first shareholder meeting on or after Jan. 21, 2011, and ask investors to indicate whether they prefer annual, biennial, or triennial votes. Both the “say on pay” and the “say when” votes are non-binding.

Two of the first companies to release proxy statements with frequency recommendations have taken different approaches to this issue. One company, Torvec, a Russell 3,000 firm based in Rochester, New York, is advising its investors to support an annual vote on compensation at its Jan. 27 annual meeting.

“[T]he board of directors has determined that shareholders should have an annual opportunity to provide input on our named executive officer compensation programs and policies. The board’s determination was based upon the premise that named executive officer compensation is evaluated, adjusted and approved on an annual basis by the board upon a recommendation from the Governance and Compensation Committee and the board’s belief that investor sentiment should be a factor taken into consideration by the Committee in making its annual recommendation,” the automotive technology company said in its proxy statement. (continue reading… )

Issues Formal Recommendations on Behalf of Corporate Directors Warning Against Unintended Consequences of Universal Requirements.

In response to the U.S. Securities and Exchange Commission (SEC) request for comment on say-on-pay, the National Association of Corporate Directors (NACD), the largest membership organization inthe United States representing corporate directors focused on demonstrating exemplary board leadership, today issued formal concerns regarding proposed new say-on-pay rules for executive compensation plans, cautioning against dependency on regular, yes-or-no votes.

NACD’s opinions are grounded in its more than 30 years of proprietary research across a broad range of board leadership and corporate governance topics, insights expressed through confidential peer exchanges with its membership spanning F100 through mid-cap and small cap companies, and best practices detailed in its Blue Ribbon Commission reports. Furthermore, NACD’s comments were reinforced by a national survey issued after the SEC’s request for comment and drew over 280 responses from its corporate director members across America.

Representing the voice of its more than 10,000 corporate director members, and amplifying performance requirements of the director profession, NACD urges the SEC not to issue universal requirements, but to allow companies to determine the most appropriate means of communicating with and seeking feedback from shareholders as a more effective governance practice. Additionally, NACD provided the SEC with specific views on frequency of say-on-pay votes, say on golden parachutes and other matters pertaining to executive compensation on behalf of the director community. (continue reading… )

The battle over advisory Say on Pay votes at public companies, which will be in full force this spring, is coming down to frequency, rather than what’s in the plans themselves. In the last week alone, the topic has been hotly debated in a Governance Center Directors’ Institute Roundtable and a Conference Board Knowledge Series Webcast on new governance requirements.

Most likely, the reason for the focus on management say on pay (MSOP) frequency proposals was the Institutional Shareholder Services (ISS) release of its 2011 proxy voting policies for public comment late last month. The ISS, whose stature seems to grow as shareholders attempt to gain more access to proxies, issued its preliminary policies on Oct. 27 with an eye on publishing its final global policy summary and concise guidelines in late December. The ISS public comment period closed on Nov. 11.

Of the many policies included in the preliminary document, Say on Pay, specifically frequency, is among the most controversial. For the first time, ISS has decided it will “adopt a new policy to vote in favor of companies providing for annual MSOP proposals.”

The ISS’ reasons for this decision? “ISS supports an annual MSOP for many of the same reasons it supports annual director elections rather than a classified board structure: because it provides the highest level of accountability and direct communication by enabling the MSOP vote to correspond to the information presented in the accompanying proxy statement for the annual shareholders’ meeting.” (continue reading… )

The new voting requirements apply to all companies that have a class of equity securities registered under Section 12 of the Exchange Act.  Unlike the recent “proxy access” rules, there is no delayed effective date for smaller reporting companies.

The SEC recently proposed rules for implenting these new voting requirements.  (A third new vote, on “golden parachutes,”  applies primarily to merger and acquisition transactions and will be discussed in a future post.) 

The proposed rules have a short (30-day) comment period, and final rules are expected to be in place before the statutory effective date.  Note, however, that companies must include the new votes in proxy statements for meetings held on or after January 21, 2011, whether or not SEC final rules are in place. 

Say-on-Pay:  Companies will be required, at least once every three years, to provide a special shareholder advisory vote on the compensation of its “named executive officers,” as such compensation is disclosed in the proxy statement.  The proposed rules clarify that director compensation is not covered by this vote.  For companies that are required to include a Compensation Discussion & Analysis in their disclosure, that section must also include a discussion of how the company took into account the results of any prior say-on-pay votes in compensation decisions.

Say-on-Frequency:  Companies will be required, at least once every six years, to provide a shareholder advisory vote on whether the say-on-pay vote should be held every one, two or three years.  Although the board may make a recommendation on frequency, shareholders must be given four choices (1, 2 or 3 years, or abstain). 

Companies will be required to discuss in their proxy statement the general effect of the two new votes, including that fact that they are non-binding.  Companies must also report in a future Form 10-Q or 10-K what action they are taking in response to the results of the “say-on-frequency” vote. 

Companies that are current recipients of TARP funds are exempt from the say-on-frequency vote, since they are required to hold an annual say-on-pay vote as long as TARP funds remain outstanding.

The proposed rules also provide that, if a company adopts the say-on-frequency choice approved by a plurality of the shareholders, it may exclude future shareholder proposals relating to say-on-pay votes.

Pursuant to rule changes recently adopted by the NYSE, brokers may not vote on these proposals without client instructions. (NYSE rules are applicable to all member brokers, so the broker voting rules may also impact companis listed on other exchanges, such as Nasdaq.)

The SEC proposal also includes some helpful transition rules:

• Companies will not have to file a preliminary proxy statement solely because of the new executive compensation votes.
• Since the requirement that shareholders be given four choices for the say-on-frequency votes may not be possible for certain proxy systems, the SEC will not object if companies are only able to provide three choices (1, 2, 0r 3 years) in the initial compliance year, as long as proxies are not voted if the shareholder does not specify a choice.

It’s all about better, more open communication than ever before.

The new federal requirement that public companies hold nonbinding shareholder votes on proposed executive compensation plans (the votes are known as “say on pay”) creates considerable challenges for corporate leaders. Image damage from “no” votes could be severe in today’s turbulent corporate governance environment, so companies must now become far more assertive in explaining how their top executives are paid.

This provision of the Dodd-Frank Act, effective next year, will have the effect of forcing public corporations to open kimonos they have long cinched tight–even companies with relatively transparent disclosure practices. They’ll have to abandon the legalistic approach of limiting their exposure of compensation discussions to that required by the SEC in proxy statement disclosures.

That change won’t come easily. Yet, despite the difficulties say on pay will create, many companies will ultimately view it as beneficial. For those who view it as an opportunity to engage in continuous dialogue about reaching corporate goals through responsible practices, it will lead to stronger links between pay and performance. (continue reading… )

They’re here: The Securities and Exchange Commission has proposed rules requiring companies subject to the federal proxy rules to give shareholders advisory votes on executive compensation and “golden parachute” arrangements, and to require institutional investment managers to report on their votes on executive compensation and “golden parachute” arrangements.

That’s in line with the Commission’s expected rulemaking schedule under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Comments on both proposals are due by Nov. 18.

Under the proposed rules, companies would be required to provide shareholders with an advisory vote on executive compensation and on the desired frequency of the vote. Companies would also have to give shareholders an advisory vote on “golden parachute” pay arrangements in connection with merger transactions, and provide additional disclosure of “golden parachute” arrangements in their merger proxy statements. (continue reading… )

• Shareholder votes on executive compensation practices initially surfaced in the UK as early as 1999.
• The first negative vote on executive compensation occurred in 2003, when GlaxoSmithKline shareholders voted against the report of compensation paid to executives.
• In 2007, in the U.S. there were about 50 companies that had shareholder resolutions calling for an advisory vote on executive compensation.
• In the 2007 – 2009 proxy seasons combined, there have been about 200 companies with shareholders voting on compensation practices.
• In 2009, under the American Recovery and Reinvestment Act, all companies receiving funds from the US Treasury (TARP) were required to include a non-binding advisory vote on compensation to the highest paid group of executives.  This resulted in approximately 400 companies required to hold such vote, mostly banks.

On July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”), was signed into law by President Obama and includes a provision requiring public companies to allow shareholders a non-binding advisory vote on executive compensation.

Specifically, the Act requires:

• A vote at least once every three years, beginning with the first shareholder meeting that occurs after January 21, 2011.  Therefore, say-on-pay will be required for many public companies this upcoming proxy season.
• Also at this first annual meeting, the shareholders must decide on whether the vote should be held every one, two or three years (thereafter a vote on frequency must be held by a separate resolution no less often than every six years).

What are Shareholders actually voting on?

With the non-binding advisory vote, what are shareholders actually going to be voting on?  Are they voting on the amount of compensation paid? Are they voting on the compensation philosophy of the company?  Are they voting on the types and delivery of compensation?  Ultimately, you would think the vote would be on all of the above but the compensation philosophy seems to be the most important issue.  Poor compensation philosophy can lead to many other problems, specifically overpayment for poor performance.

Issues to Consider

As with many of the provisions in the Act, there will unintended consequences of the new legislation.  Here are a few issues to consider when asking shareholders to vote on executive compensation:

• Companies will need to revise proxy statements to include the mechanics of voting on compensation.  Will the Board make a recommendation on the vote?
• Institutional shareholder advisory services will have a greater influence on compensation practices as a result of the vote and therefore companies will more likely want to comply with mandates from such advisory firms (i.e. employment agreements, change in control provisions, severance arrangements).
• Ongoing educational efforts of a company’s compensation plans and philosophy will be necessary to inform shareholders required to vote, especially since retail shareholders/brokers will need instructions from beneficial owners in order to vote the shares in favor of compensation plans (no instructions = a no vote).
• While the vote is “non-binding”, Directors will be forced to react to such votes or risk a “withhold” vote on their re-election as board members.  In the 2010 proxy season, there were three companies that received a no vote (KeyCorp, Occidental Petroleum and Motorola)…so it can happen.
• A more subtle influence of the Say on Pay shareholder vote of confidence will be the risk of focusing senior management on shorter term performance results so that a company’s annual performance will justify higher compensation when a longer-term, strategic investment focus would result in greater shareholder value in the long run.

With the many issues to consider and the potential of getting a negative vote from shareholders on compensation practices, companies would be wise to get an early start on reviewing current practices and seek advice on their proxy draft now.

So many of the problems we face today result from poor decision-making by private corporations. Prominent examples include the Gulf oil spill and the seriously weakened financial sector, which is imperiling the rest of our economy. However, so many who describe themselves as liberals or progressives seek to address such problems with more government regulation and programs instead of by preventing the bad decisions at the source, which is likely to be more efficient from a resource utilization perspective.

That is, having government do or prohibit something is inherently more costly than having the private sector get to the same result on its own as a result of the cost of the government. It is also arguably less effective because the government is not the direct stakeholder and does not have the same access to information or incentives as do properly informed, incentivized private actors. Of course, as we currently see, using government programs to rectify problems created in the private sector is the most expensive of all the alternatives. How does one get better decisions in the private sector?

While there is no foolproof way to prevent such bad decisions, many analysts believe that the field of “corporate governance” is a very good place to start. This field involves efforts to get the right people and the right information into the decision-making process so as to enhance the likelihood of a “good” — or at least non-disastrous — decision. It’s hardly a secret that for too long, many business decisions have resulted from inadequate deliberation by an “old boys’ club” which did not reflect multiple viewpoints or sufficient consideration of risks and benefits. The field may at first glance seem like a dusty academic area, but it is actually fundamental to the well being of all Americans.

In recent years, corporate governance scholars such as Lucian Bebchuck of Harvard Law School, Nell Minow of The Corporate Library and James McRitchie of CorpGov, activist investors such as CalPers, CalSTERS, Carl Icahn, Andrew Shapiro and Bill Ackman and, to some extent, the Delaware courts, have sought to change this situation by facilitating better process and more inclusive boards of directors. A major step forward is the inclusion in the new financial regulation bill of expanded proxy access for minority shareholders in public company board of director elections, in order to get more viewpoints into the boardroom. Arguably in the same vein, is the inclusion in the bill of a non-binding ‘say-on-pay’ vote for shareholders (continue reading…)

Image via Wikipedia

I just got a press release from the American Accounting Association that shocked the bejeezus out of me: Contrary to what every cynical bone in my body dictates, shareholders at some companies really have tackled the issue of excessive pay, and directors have actually heeded their complaints.

I don’t have the actual study — that’s being released at the association’s annual meeting early next month — but I have the summary findings. And wow, are they heartening.

Few companies have granted shareholders proxy access to float their own slate of directors, or even given them a non-binding say-on-pay. But apparently, a growing number of shareholders have used tried-and-true political tools to approach the issue differently: They’ve mounted “vote no” campaigns, persuading other shareholders to vote the heads of overly generous compensation committees off the board. According to the association’s study, such campaigns resulted, on average, in a drop of 38% in CEO pay for that year.

Nor was this confined to any one industry. The list of companies the association offers as examples include Toll Brothers,Yahoo, UnitedHealth, United Natural Foods, Sanmina-Sci, Saks Inc, Sprint, Qwest Communications, Legg Mason, Lennar, KB Home, Constellation Energy, and Apple. If you can spot a pattern here, tell me.

And the study turned up another heartening factoid: Institutional investors, which presumably have a lot of savvy and ample ability to apply it, have begun to insist on an active role in designing pay packages. What the press release calls “pay-design proposals” by such investors resulted in average pay reductions of about $2.3 million in companies with “excessive CEO pay” — defined as “an amount greater than what would be expected on the basis of a number of standard economic determinants, including firm size, return on assets, stock performance, and industry.”

The institutional investors were smart enough not to dictate dollar amounts, simply to design packages that strengthened the link between pay and performance, between bonuses and profits, between stock grants and shareholder value.

I’ve always said that nothing will change until shareholders are allowed to vote directly on pay. The study concludes differently:

The findings would seem to bode well for the increase in shareholder say on pay likely to result from the major financial-reform bill that President Obama signs into law today.
<…>
“This study casts doubt on the two most frequent criticisms of increased shareholder say on pay — either that it will be largely ineffective or that it will lead to radical changes dictated by unions or other special-interest groups,” comments Fabrizio Ferri of New York University, who carried out the new research with Yonca Ertimur of Duke University and Volkan Muslu of the University of Texas at Dallas.

This is one of those cases where I want so badly to shout “I was wrong, I was wrong!” Fingers crossed, eyes crossed…

And on a related note…

According to today’s NYTimes, Goldman Sachs is — by its standards, at least — cutting back on excess pay.

For a second quarter in a row, the investment bank’s pay ratio was 43 percent of revenue; in the past, Goldman paid out around 50 percent to staff. For ordinary mortals, the numbers are still staggering: on an annualized basis, $545,000 is being set aside for each of the firm’s employees. But it does look like Goldman might finally be listening to its critics.

The piece goes on to suggest that shareholders move to lock in the lower pay ratios. 24 hours ago I’d have snorted and said, Fat chance!. But now that I see this study…well, repeating myself, fingers crossed, eyes crossed…

div class=”zemanta-pixie”>