The Evolving Say on Dodd-Frank’s ‘Say on Pay’

By Bruce J. McNeil, Littler Mendelson May 4, 2012

The so-called “say-on-pay” provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act are beginning to make headlines as U.S. public companies grapple with shareholder advisory votes on executive compensation.

In 2011, the Securities and Exchange Commission (SEC) adopted final rules implementing Dodd-Frank section 951’s requirement that SEC-registered issuers provide shareholders at least once every three calendar years with a separate nonbinding say-on-pay vote regarding the compensation of the company’s named executive officers, the chief executive officer, the chief financial officer and the company’s three other most highly compensated officers. Although the vote on compensation is nonbinding, the company must include a statement in the Compensation Discussion and Analysis of the proxy statement whether and, if so, how its compensation policies and decisions have taken into account the results of the shareholder say-on-pay vote. As a result, the vote of the shareholders will be taken seriously not only by the company but also by other companies in the same marketplace.

Amid negative news media coverage of executive compensation packages, approximately 1.5 percent to 2 percent of the many nonbinding say-on-pay votes occurring in the 2011 proxy season failed to secure shareholder approval. In some cases where a majority of shareholders voted against the say-on-pay resolutions of a company, a shareholder derivative lawsuit against the board of directors has followed. In Teamsters Local 237 v. McCarthy (Sept. 16, 2011), a Georgia state court dismissed a shareholder suit because, among other things, a negative say-on-pay vote failed to create a reasonable doubt that the challenged compensation decisions were valid exercises of business judgment. However, an Ohio federal court declined to dismiss a suit against the board of Cincinnati Bell brought after 66 percent of the company’s shareholders voted against the 2010 executive compensation package.

In April 2012, 55 percent of Citigroup's shareholders voted against CEO Vikram Pandit's $15 million compensation package for 2011, a year when the bank's stock tumbled. At the time of the vote, Pandit had received nearly $7 million in cash for 2011 with the remainder to be paid in restricted stock and cash over the next few years (and thus subject to possible restructuring by the board). Citigroup's shareholders expressed concerns that the compensation package lacked significant and important goals to provide incentives for improvement in the shareholder value of the institution. Soon after the vote, a shareholder filed a derivative lawsuit against the CEO, the board of directors and other directors and executives for allegedly awarding excessive pay to its senior officers.

Practical Tips

While shareholder disapprovals remain uncommon, many experts advise that compensation and the manner in which it is awarded should be considered carefully before subjecting the compensation to a shareholder vote. CEOs often engage counsel to advocate for a compensation package. Some observers say it is increasingly obvious that compensation committees must receive independent counsel to evaluate performance objectives and analyze executive compensation in similarly situated companies.

Without an independent assessment and in a media-focused environment, negative reaction from shareholders is a growing concern. Once shareholders register their disapproval through the say-on-pay vote, the company and the board of directors are at risk for a shareholder derivative lawsuit. Thus, the implications and risks of the Dodd-Frank rules on say on pay reverberate beyond the advisory, nonbinding shareholder vote.

Bruce J. McNeil is a shareholder in the Minneapolis office of law firm Littler Mendelson. He is the author of over 28 books and the author or co-author of over 80 articles on employee benefit matters.

© 2012 Littler Mendelson. All rights reserved. Republished with permission.

Related Articles:

Above-Peer CEO Pay Decreased Shareholder Support, SHRM Online Compensation Discipline, March 2012

Game Plan: The Next Say-on-Pay Vote Might Not Be as Easy to WinSHRM Online Compensation Discipline, January 2012

Companies Work to Achieve Positive Say-on-Pay Votes, SHRM Online Compensation Discipline, August 2011

Quick Links:

SHRM Online Compensation Discipline

SHRM Salary Survey Directory

SHRM Compensation Data Center

SHRM Metro Economic Outlook reports

Sign up for SHRM’s free Compensation & Benefits e-newsletter


Job Finder

Find an HR Job Near You
Search Jobs


HR Daily Newsletter

News, trends and analysis, as well as breaking news alerts, to help HR professionals do their jobs better each business day.