Say-On-Pay: The First Results Are In

Pursuant to enacted legislation, shareholders of publicly owned companies are entitled to hold a non-binding vote on executive compensation packages (say-on-pay). With the 2011 say-on-pay votes complete and a substantial portion of the 2012 say-on-pay votes well underway, analysis of all the available data is beginning to give say-on-pay supporters reason to celebrate.


During the first Congressional hearing into the financial crisis, Richard Fuld, the former Chief Executive Officer of Lehman Brothers, was forced to defend his receipt of $484 million in salary, bonuses, and stock options between 2000-2008 Part of his explanation was to suggest that, because the collapse of Lehman relegated his stock worthless, his actual earnings were closer to $350 million (Id.). He conceded, “That’s still a lot of money” (Id.).


That sure is a lot of money for someone who, by virtue of his title as CEO, bears responsibility for the taxpayer bailout needed to prevent the collapse of Lehman Brothers, and the far-reaching ripple effects that would ensue. Mr. Fuld’s story is of course not unique. In the immediate aftermath of the financial crisis, public outcry over the immense executive compensation packages received by the leaders of these failing companies reached an apex.


The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), signed into law on July 21, 2010, sought to provide shareholders of publicly traded companies a voice in executive compensation decisions—a say on pay. Under Section 951 of Dodd-Frank, publicly traded companies must hold a non-binding vote at least once every three years for shareholders to approve or disapprove of executive compensation. The three central tenants behind supporting “say-on-pay” are, “(a) say-on-pay brings greater attention to executive pay policies and practices; (b) shareholders feel more connected with the process of setting executive pay; and (c) directors and management give increased attention to whether executive pay is consistent with shareholders’ views.” The available data so far shows that say-on-pay has been effective towards achieving these three aims.


Semler Brossy, an executive compensation consulting firm, has collected say-on-pay results from companies in the Russell 3000 Index (the 3,000 largest companies based on total market capitalization) In their newest report (current as of September 3, 2012), Semler Brossy data and analysis shows that, of the over 2,000 say-on-pay votes that have taken place, over 72% of companies have passed say-on-pay votes with overwhelming support (over 90% shareholder approval). 91% of companies have passed with over 70% approval—considered the benchmark approval percentage needed for permissible executive compensation packages—and only 53 companies (2.6%) have failed a say-on pay vote. As of May 15, 2012, of the 16 companies that failed a vote in 2011 that have held another vote in 2012, all have passed. Semler Brossy notes that the average vote result for these 16 companies was 89%, an increase of 48% from 2011. Semler Brossy shows that each of the 16 companies undertook measures to improve their score, including: increasing performance-based equity tied to specific performance measures in long-term incentive programs, undertaking significant shareholder outreach efforts, reducing absolute CEO pay year over year,  and eliminating “problematic” pay practices as defined by proxy advisors.


One of the most important changes to come with the advent of say-on pay—votes is the increased influence and impact of proxy advisors. The most important advisory firm, ISS, has assessed 2,067 of the Russell 3000 companies, of which 2,025 have reported vote results. ISS has recommended shareholders vote to disapprove executive compensation for 14% of companies. For these companies, shareholder approval is 64%. Although 64% still constitutes an approving vote, it is below the 70% benchmark and well below the 94% approval average companies garner when ISS gives them a ‘for’ recommendation.


Professional analysis of the collected data has already been undertaken. Katayun Jaffari and Josh Bobrin, writing in “The Legal Intelligencer” suggest that preparation for an approval process typically requires companies and their compensation committees to engage their shareholders early. They note, “Engaging and communicating with shareholders is vitally important and must start early, beginning with the end of the most recent proxy season, and must occur frequently and regularly throughout the year… Companies have approached shareholder engagement in several ways, such as creating a separate website to provide information and to accept comments directly from shareholders on executive compensation pay practice, and providing other forums where shareholders can communicate their concerns and comments.” The growth and sophistication of communication between companies and their shareholders indicates progress is already underway towards achieving the policy goals of say-on-pay.


One important take-away from the available data is the role “pay for performance” has had on vote outcomes. Jaffari and Bobrin remark, “In most cases where ISS has issued a negative recommendation, the advisory firm has indicated that a disconnect between pay and performance exists. The ISS analysis of pay for performance focuses heavily on the alignment of an executive’s total pay and total shareholder return (stock price performance plus any paid dividends). ISS then compares this ratio to those found at the company’s peer group. In addition, they note, “Pay for performance clearly reared its head in the 2012 proxy season as the correlation between a company’s total shareholder return (TSR) and the results of say-on-pay increased when measured against the 2011 proxy season.” Although say-on-pay does not explicitly connect executive compensation with performance, it certainly appears to satisfy one of the legislative goals of Dodd-Frank—to better hold executives accountable to their shareholders.  


Say-on-pay certainly in and of itself will not prevent financial crises such as the one that catapulted Dodd-Frank into law. Although still in its infancy, the say-on-pay initiative of Dodd-Frank appears to be progressing towards accomplishing its policy goals of increasing and improving communication between shareholders and companies, as well as better holding executives accountable by creating a more direct link between performance and pay.