Companies not Quite Ready for Say on Pay

January 5, 2011 ( - U.S. companies are split on how frequently they should put their executive compensation programs to a nonbinding say-on-pay shareholder vote, according to a new poll conducted by Towers Watson.

The poll also found that while some companies are making adjustments to their pay-setting processes to prepare for the say-on-pay era, many are not yet clear on how to assess the success of the vote, and even fewer are prepared to address the results of the shareholder poll.  

Towers Watson explained in a press release that the Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies to conduct say-on-pay votes at least every three years, but the law leaves it to each company to decide whether it will hold annual, biennial or triennial votes (see Financial Reform Measure Includes Compliance Provisions). Companies are also required to put the say-on-pay frequency question to a nonbinding shareholder vote at least every six years. Proposed SEC regulations would require public companies to conduct the first of these so-called “say on when” votes in 2011 (see SEC Say-on-Pay Rules Coming Soon).   

The Towers Watson poll of 135 U.S. publicly traded companies found that 51% of respondents expect to hold annual say-on-pay votes, while 39% prefer the vote be held every three years, and 10% anticipate holding biennial votes. Four in 10 respondents cited accountability to shareholders and a desire to minimize administrative burdens as factors having the greatest influence on their vote-frequency recommendation, while slightly fewer cited shareholder preferences, proxy advisor policies, and providing shareholders with an avenue to express concern about executive pay without casting negative votes on other matters as key factors.  

According to the press release, nearly half (48%) of surveyed companies are making some adjustments to their executive pay-setting process in preparing for the upcoming proxy season, although many companies have already strengthened their processes in recent years in light of growing shareholder activism and intensifying scrutiny of pay issues. Among those making further changes in preparation for the 2011 proxy season, 65% are devoting more attention to explaining their programs in the Compensation Discussion & Analysis (CD&A), 41% are performing additional analyses on the link between their executives’ pay and company performance, and 30% have made or are considering changes to programs such as severance, change-in-control benefits and perquisites that have high visibility.  

Almost half (49%) of the respondents don’t know what level of favorable shareholder say-on-pay votes will be considered a successful outcome by their boards, and only 8% of the respondents have a process in place for analyzing the results of the vote and developing appropriate action plans in response to potential shareholder concerns. Of those companies that have defined how they will evaluate success, most believe that a favorable shareholder vote of at least 80% would be considered successful.