How these companies respond could have a direct impact on their compensation administration in the future because regulators will provide guidelines that prohibit incentive compensation that encourages inappropriate risks (by providing excessive compensation) or that could lead to material financial loss.
Legislation Affecting Executive Compensation: What is Say on Pay?
Say on Pay "requires a non-binding advisory vote [by shareholders] on compensation of named executive officers; it’s been in effect for 2 years now." Deborah Lifshey explained in a recent BLR webinar. Say on Pay became effective for any shareholder meeting occurring after January 21, 2011.
As a shareholder, what exactly are you voting on? You’re voting on "named executive officer compensation as disclosed in your Compensation Discussion and Analysis . . . [and] your six compensation tables and related narrative." Lifshey explained. The named executive officers generally include five people: the CEO, CFO, and the next three highest-paid executives. (Sometimes there are more in special circumstances.) Basically, Say on Pay allows shareholders give their opinion on the executive pay for these top people in the organization.
Remember, however, that regardless of the outcome of the vote, it is non-binding. As such, the vote cannot be construed to overrule a decision by the board of directors. Another issue is that the wide scope of topics covered by a single vote is problematic; since the vote is on the whole package, a negative vote doesn’t tell us what the problem is. It could be, for example, a specific payment, or a problem with the pay for a specific executive.
That said, Say on Pay does have teeth—executive pay has been affected. "Those companies that got low voting results took a lot of action to try to correct this and to try to make it better." Lifshey noted. A high level of shareholder support for the company’s executive compensation program is desired, but strong shareholder support in the past may not continue in the future if a company has a number of policies or plans that are considered poor pay practices.
For more information on the Say on Pay provision of the Dodd Frank Act and how it impacts executive compensation, order the webinar recording of "Executive Compensation: How to Stay Competitive and Compliant Under the JOBS Act and Say on Pay." To register for a future webinar, visit http://catalog.blr.com/audio.
Deborah Lifshey, a Managing Director in the New York office of Pearl Meyer & Partners, specializes in advising clients on compensation matters from a legal perspective, including securities disclosure, taxation and corporate governance issues, as well as contract negotiations and reasonableness opinion letters.
“Non-binding” says it all. It seem an awful lot paying lip service, especially when you consider how few shareholders actually vote.