Looking to Benchmark Pay?
Say-on-Pay
In 2011 the SEC approved the non-binding Say-On-Pay rule as one component of the executive compensation provision of the Dodd-Frank Act, the comprehensive financial regulatory reform legislation enacted due to the collapse of industry giants Lehman Brothers and AIG, and the near demise of many others. The executive compensation provision restricts executive pay to discourage companies from awarding lucrative packages that encourage excessively risky behavior. Other components of the executive compensation provision include clawbacks (recouping executive compensation in the event of an accounting restatement), compensation committee and adviser independence, enhanced compensation disclosures, and corporate governance.
Shareholders now have a nonbinding vote on executive compensation packages, at minimum, once every three years. They also have separate nonbinding votes on golden parachutes (covered earlier) in connection with merger transactions. The new rule was implemented starting with the 2011 annual meetings for public companies with public investors owning greater than $75 million worth of shares. Smaller companies had to be compliant with this requirement effective 2013.
Although the Say-On-Pay rule is nonbinding, companies must disclose in public filings whether they followed the shareholder vote. If the Board does not make adjustments to executive compensation based on the shareholder vote, it may face several negative repercussions: dissension between the Board and shareholders, the negative recommendations of major shareholder advisory firms, lowered investor confidence, and directors may not get re-elected.
How should companies manage the Say-On-Pay process?
- Establish formal communication plans
- Proactively identify potential executive pay issues and concerns in advance
- Make transparent the rationale behind their executive pay programs in the proxies' compensation discussion and analysis section
- Partner with proxy advisors
- Work with key institutional shareholders
- Work closely with Legal and Finance teams to ensure compliance