Say-on-Pay: An Effective Voice on Executive Compensation for Shareholders?

According to a recent PricewaterhouseCoopers study, 72% of US corporate boards are willing to reconsider executive compensation if shareholders vote against “say-on-pay” resolutions, advisory votes on executive pay required by provisions of the Dodd-Frank Act. Whether or not your board includes itself in that majority, it’s clear that the say-on-pay rules are shaping the way corporate boards interact with shareholders and will continue to do so for years to come.

In advance of the 2012 proxy season, five takeaways on say-on-pay, from lawyers and law firms on JD Supra:

– Shareholders generally approve management compensation plans: 

“During the 2011 proxy season, only forty companies [out of more than 2000] failed to achieve majority shareholder support for mandatory Dodd-Frank Say-on-Pay resolutions.” (From Dodd-Frank One Year Later: The Public Company Executive Compensation, Governance and Disclosure Provisions by Morrison & Foerster LLP) 

– Shareholders prefer to vote on management compensation every year:

“Annual voting on say-on-pay was the top choice by stockholders for 81% of public companies … even in the face of management recommendations of triennial votes.” (From The Dodd-Frank Wall Street Reform and Consumer Protection Act: A Review of the 2011 Proxy Season and a Look Forward to 2012 by Venable LLP)

– Shareholders don’t like being ignored (especially when boards give themselves undeserved raises):

“The facts alleged in the complaints follow a common pattern: (i) a corporation adopts a “pay-for-performance” philosophy or guidelines; (ii) the corporation experiences a decrease in financial performance; (iii) the board of directors and the compensation consultant both recommend an increase in executive compensation despite the decrease in financial performance; (iv) the shareholders deliver a negative vote on “say-on-pay”; and (v) the board of directors nonetheless approves or fails to rescind, alter or amend its recommendation for increased executive compensation.” (From Defending Against Shareholder “Say-On-Pay” Suits by Dechert LLP) 

– Breach of fiduciary duty lawsuits have a high hurdle to overcome:

 “In viewing the decision of a Georgia court that interpreted Delaware law, the key lessons appear to be (1) a negative Say-on-Pay Vote does not suggest that there is a per se violation of fiduciary duties; and (2) fiduciary duties do not require boards to revisit prior compensation decisions based on a negative Say-on-Pay Vote.” (From Georgia Court: Adverse Shareholder Say-on-Pay Vote, Without More, Does Not Invalidate or Require Rescission of Compensation Decisions Made by Directors of Delaware Corporations by Duane Morris LLP) 

– The rulemaking continues to evolve:

“On July 8, the Securities and Exchange Commission’s Division of Corporation Finance issued new Compliance and Disclosure Interpretations (C&DIs) on executive compensation disclosure and reporting with respect to the frequency of shareholder advisory votes on executive compensation (i.e., ‘say on pay’).” (From SEC Issues New Interpretations Related to Executive Compensation and Say-on-Pay Reporting by Katten Muchin Rosenman LLP) 


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