Shareholders Press Companies for Annual Say-on-Pay Votes

Holding an executive pay poll every three years is insufficient, shareholder activists say

Stephen Miller, CEBS By Stephen Miller, CEBS August 24, 2017

Increasingly, shareholders of publicly traded companies want to be polled annually on whether they approve of the firm's executive pay package and companies are responding, an analysis of 2017 proxy season voting shows.

Under the Dodd-Frank Act, publicly traded U.S. companies are required to hold an annual, biennial or triennial advisory shareholder vote on pay to top executives. The votes are nonbinding, but when a majority of shareholders vote against a company's compensation plan, the company typically responds by more tightly aligning pay with performance, compensation advisors say.

In addition, under Dodd-Frank, public companies must poll shareholders once every six years on how frequently they wish to vote on say-on-pay: annually, every two years, or (at a minimum) every three years.

"An annual vote on executive compensation is a better option because it affords shareholders the opportunity to provide a company's compensation committee more timely feedback about the appropriateness of executive pay levels, which typically are decided on an annual basis," said Maureen O'Brien, director of corporate governance at Segal Marco Advisors in Chicago, a consultancy that advises public firms on shareholder matters.

2017 is a year when most public companies polled shareholders on how frequently they wish to vote on say-on-pay, O'Brien said. "This vote takes place once every six years, so another opportunity would not come until 2023," she noted.

A switch to annual voting on compensation was supported by institutional investors that are part of a say-on-pay investor working group coordinated by Segal Marco Advisors. The investor group found that 319 Russell 3000 firms limited the say-on-pay vote to once every three years.

Of the 319 firms with triennial voting contacted by the investor working group last October:

  • 46 of them did not have a say-on-pay frequency vote this year because either they underwent a change in control or the vote will happen at a future meeting.

  • Shareholders at the remaining 273 companies favored an annual vote.

Of 319 firms with triennial say-on-pay voting:

17-1087 Say-on-Pay Voting Graph-01a.jpg

Source: Segal Marco Advisors.

Because the shareholder vote on frequency is also nonbinding, corporate boards are free to disregard their shareholders' opinion—although doing so could sour investor relations. 

Nevertheless, of the 273 companies with triennial voting where shareholders favored an annual say-on-pay vote:

  • 146 companies switched to an annual frequency.

  • 127 remained with a triennial vote.

At the 273 companies where shareholders preferred an annual vote:

17-1087 Say-on-Pay Voting Graph-02b.jpg

Source: Segal Marco Advisors.

The list of the 146 companies that switched to an annual say-on-pay vote includes, Comcast Corp, and Lululemon Athletica.

"Shareholders should not have to wait three years to express their views on executive compensation," commented Illinois State Treasurer Michael Frerichs, a member of the investor working group. "Annual say-on-pay votes are a straightforward way to understand investors' views on executive pay."

[SHRM members-only toolkit: Designing Executive Compensation Plans]

Aligning with Shareholders' Preferences

Separately, consultancy Willis Towers Watson looked at publicly traded companies that held a say-on-pay frequency vote in both 2011 and 2017 and found:

  • At 27 percent of companies, the board of directors switched from recommending a triennial say-on-pay vote to recommending an annual vote. Smaller public companies had the highest amount of triennial-to-annual frequency recommendation changes.

  • 9 percent of companies went from triennial to annual say-on-pay votes in 2017.

  • Fewer than 10 companies switched from an annual to a triennial frequency in 2017.

"2017 data show that companies are following their shareholders' preferences by opting for annual say-on-pay votes," said Henry Mbom, executive compensation consultant in Willis Towers Watson's New York City office.

"Most institutional investors favor annual say-on-pay votes," he noted. "Consequently, companies with a strong record of say-on-pay support … often default to annual say-on-pay votes to align themselves with investors' preferences."

Financial Choice Act Consequences

The Financial Choice Act, which passed the U.S. House of Representatives in June and has not been taken up in the Senate, would, among other provisions, require shareholder votes on executive compensation only in cases of material changes to executive compensation programs rather than over any fixed duration. The bill, which is opposed by shareholder activist groups, also would eliminate the requirement that companies hold a say-on-frequency vote at least once every six years.

There is a sharp political divide over the bill.

"The Financial Choice Act seeks to gut investors' rights and reduce corporate accountability on a host of issues, including bloated executive pay," said Thomas DiNapoli, New York State Comptroller and a member of the investor working group coordinated by Segal Marco Advisors. "Limiting shareholders' right to vote on compensation sends a dangerous message to corporate executives that there are no consequences for excessive risk-taking or poor performance."

But prior to the House vote, Rep. Lee Zeldin, R-N.Y., a sponsor of the legislation, said that the Financial Choice Act addresses harmful aspects of the Dodd-Frank legislation that discourage companies from going public, and that "passing Choice is a crucial next step to grow the American economy and unleash its full potential."

However, some analysts believe that corporate boards would be reluctant to take away existing shareholder rights, even if the legislation were enacted.

"In light of the strong shareholder support for annual say-on-pay votes reflected in the 2017 say-on-frequency voting, it is unclear whether this provision, if enacted into law, will have any practical import," according to an analysis by law firm Skadden.

Related SHRM Articles:

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

SEC Adopts 'Say-on-Pay' Final Rules; Companies Weigh Frequency of Shareholder Votes, SHRM Online Compensation, January 2011

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