Community Corner


Say-When-on-Pay Proposal Findings

Summary

The Dodd-Frank Act has placed many important new decisions on corporate plates for 2011. One of the first will concern how often a firm should hold their newly-mandated say-on-pay vote. The new rules allow shareholders to voice their opinion on the frequency of the say-on-pay vote, through what is becoming known as a "say-when-on-pay" proposal. We studied early proxy filers and companies who had their annual meetings prior to February 1, 2011, in order to get the initial word on say when on pay.

Recent SEC Decisions Related to Dodd-Frank

  • Three years is the most popular term at the moment. In proxies filed in December 2010 and January 2011, slightly more than half of the companies who discussed say when on pay suggested a triannual vote.

    • One-third of companies proposed holding their say-on-pay votes annually.

    • Very few companies proposed biannual votes.

  • Some shareholders are supporting annual votes, even if the company does not. Among the 23 companies which held an annual meeting before February 1, 2011, 35% saw shareholders supporting a frequency different from that proposed by the company.

    • In each of these cases, the company proposed that the say-on-pay vote occur either bi- or triannually; shareholders lobbied for an annual say-on-pay vote.

    • Three of the companies facing shareholder disagreements have announced that they will change to annual plans, in keeping with shareholders' wishes.


Say When on Pay

Among the many items on the corporate to-do list resulting from the Dodd-Frank Financial Reform Act is a decision regarding how often to hold the newly-mandated say-on-pay vote. The legislation requires that companies hold a say-on-pay vote at least once every three years, and that the frequency of such votes be the subject of a non-binding shareholder vote (via a so-called "say-when-on-pay" proposal) once every six years. As such, boards are faced with a decision when preparing the first proposal regarding the frequency of the say-on-pay vote: should they suggest that the say-on-pay vote be held annually, as many shareholders have requested, or should opt for a vote once every three years, potentially allowing for alignment with long-term-incentive-plan performance cycles? Should they seek to compromise by suggesting a vote every two years? A last alternative is to make no recommendation and allow shareholders to voice their opinion without guidance from the company. Of course, this is the beginning of the first proxy season under the say-on-pay regime here in the U.S., and only a small portion of companies have announced vote results for the say-when-on-pay proposal, but the early results are informative when it comes to company desires and shareholders' demands.


Proposed Frequency

During December 2010 and January 2011, 166 companies in the Equilar database filed "say-when-on-pay" proposals. As shown in the chart below, most of these companies (53%) proposed that the say-on-pay vote be held every three years. One-third (33%) proposed that the say-on-pay vote be held annually. Fewer than one in ten (8%) companies proposed that the vote be held every other year, while only 6% of companies made no recommendation regarding the frequency of the votes.


The chart below provides the breakdown of frequencies proposed by companies that filed their proxy between December 1, 2010 and January 31, 2011.


Frequency Proposed by Companies

Proxies filed in Dec 2010 and Jan 2011

Reasons for Frequency Preferences

Companies that recommended that the vote be held every three years often referred to the fact that their long-term incentive plan performance cycles are three years, making it simple to align a say-on-pay vote with this cycle. Another common reason provided for the triennial schedule was to provide the company with time to discuss the vote results with shareholders, and to implement the suggested changes resulting from those discussions. For example, in the say-when-on-pay proposal included in its December 2010 proxy statement, Johnson Controls stated the following:


"An advisory vote every three years will be the most effective timeframe for the Company to respond to shareholders' feedback and provide the Company with sufficient time to engage with shareholders to understand and respond to the vote results. The Company also believes a triennial vote would align more closely with the multi-year performance measurement cycle the Company uses to reward long-term performance. Our executive compensation programs are based on our long-term business strategy, which is more appropriately reflected with a three year timeframe."


This argument was echoed by Robert Greifeld, CEO of Nasdaq OMX, in an editorial published in the Wall Street Journal on January 19, 2011. In the piece, Greifeld argued that "[t]he key is making sure that the vote lines up with the trend towards encouraging paying for long-term performance and discouraging paying for the 'arrow in flight.' "


On the other hand, Institutional Shareholder Services (ISS), a proxy advisory firm, prefers that companies provide shareholders an opportunity to have a say-on-pay vote every year. ISS, which refers to the say-on-pay vote as the "management 'say on pay' or MSOP", provides the following explanation in its 2011 updates for its US Corporate Governance Policies:


"In line with overall client feedback, ISS is adopting a new policy to recommend a vote FOR annual advisory votes on compensation.


The MSOP is at its essence a communication vehicle, and communication is most useful when it is received in a consistent and timely manner. ISS supports an annual MSOP vote for many of the same reasons it supports annual director elections rather than a classified board structure: because this provides the highest level of accountability and direct communication by enabling the MSOP vote to correspond to the majority of the information presented in the accompanying proxy statement for the applicable shareholders' meeting. Having MSOP votes every two or three years, covering all actions occurring between the votes, would make it difficult to create the meaningful and coherent communication that the votes are intended to provide. Under triennial elections, for example, a company would not know whether the shareholder vote references the compensation year being discussed or a previous year, making it more difficult to understand the implications of the vote."


Vote Results

Among the companies studied, 23 held their annual shareholders' meetings before February 1, 2011. Since companies must file preliminary vote results on Item 5.7 of Form 8-K within four business days of the annual meeting where the vote took place, voting results are readily available. In most cases (61%), the frequency proposed by the company was supported by the highest percentage of shareholders.


However, more than one-third (35%) of the time, the shareholders supported a frequency different than that proposed by the company. In each of these cases, the company proposed that the say-on-pay vote occur every two or three years, and shareholders voted to have the right to vote on say on pay on an annual basis. In one case, the company provided no recommendation regarding the frequency of the vote, and shareholders at that company voted to have an annual say-on-pay vote.


Below is a chart representing the outcome of shareholders' votes on the frequency of say on pay for companies that held their annual meeting before February 1, 2011.


Frequency Voted on by Shareholders

For votes held before February 1, 2011

Company Responses to Vote Results

The final rules issued by the SEC do not require companies to disclose their decision regarding the frequency of the votes in the Form 8-K reporting the vote results. Instead, it gives companies the opportunity to report their decision in an amendment to Item 5.7 of Form 8-K once the decision is made (but, generally, no later than 150 days after the annual meeting where the vote took place). However, three companies have already announced that they will change their plans to reflect shareholder preferences; in all three cases, shareholders wished to hold say-on-pay votes on an annual basis:

  • Ashland Inc. recommended that its shareholders support a triennial say-on-pay vote in their proxy statement, filed on December 3, 2010. However, at the annual meeting held on January 27, 2011, the majority (67.8%) of the shares voted (excluding abstentions and broker non-votes) were cast in favor of an annual say-on-pay vote. In its Form 8-K filed on February 1, 2011 Ashland announced the vote results and their decision to adopt an annual say-on-pay vote, stating: "the Board of Directors determined to follow the shareholders' recommendation and implement an annual advisory vote by the shareholders on the compensation of the named executive officers."

  • Similarly, Costco Wholesale Corp. recommended that shareholders support a triennial say-on-pay vote in their proxy statement filed on December 13, 2010. Instead, a majority (52.6%) of the shares voted (excluding abstentions and broker non-votes) were cast in favor of an annual vote. In the Form 8-K filed by Costco announcing the vote results, the company announced that "[o]n January 27, 2011, the Board of Directors of the Company determined that it will include annually in the proxy materials a shareholder vote on the compensation of executives until the next required shareholder vote on the frequency of shareholder votes on the compensation of executives."

  • Monsanto Co. also recommended a triennial vote schedule in its December 10, 2010 proxy statement, and shareholders cast a majority (62.5%) of votes (excluding abstentions and broker non-votes) in favor of an annual vote. In their Form 8-K filed on January 25, 2011, the company simply stated: "[i]n accordance with the results of this vote, the Board of Directors determined to implement an annual advisory vote on executive compensation."


Other companies facing this situation have not yet announced whether they will move forward with their proposed frequency or change to the frequency supported by their shareholders. As proxy season progresses, it will be interesting to see how many companies must make a similar decision about whether to move forward with their originally suggested frequency, or make changes in response to the first shareholder votes on say when on pay.


1. Companies with a public float below $75 million or revenues of less than $50 million will not be required to hold a vote until Jan. 21, 2013.


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