The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank) was signed into law in the United States a little more than one year ago.

Out of the 850 pages of Dodd Frank, two pages made up Section 951 of the bill that provided shareholders of US public companies with the ability to provide a “yay” or “nay” vote on three types of votes on executive compensation: (i) an advisory vote to approve the compensation paid to named executive officers in the prior fiscal year (the say-on-pay or SOP vote); (ii) an advisory vote on how often this vote should be held (the frequency vote, sometimes referred to as the say-when-on-pay vote) and (iii) an advisory vote to approve so-called “golden parachute payments” made in connection with an acquisition, merger or other specified corporate transaction (the golden parachute vote).

From its origins in the United Kingdom, a form of say-on-pay now exists in at least six countries, with several others contemplating its addition into their corporate governance lexicon. While the exact mechanics of each country’s say-on-pay regime differ, they all operate similarly to provide shareholders with a powerful new voice in an area once left to the corporate boardroom: a vital say in corporate compensation decisions.

In the US, early attention of companies and executive compensation professionals was on the frequency vote and what frequency companies would recommend and shareholders would support. However, in the last several months, the focus has been on SOP votes, proxy adviser recommendations, company responses and meeting results.   

Frequency Vote

Early in the 2011 proxy season, public companies and their advisors spent much time and effort discussing whether companies should recommend annual, biennial or triennial say-on-pay votes to their shareholders. Institutional Shareholder Services (ISS) had published its 2011 voting policies and supported an annual SOP vote for all companies, without regard to individual company facts and circumstances. ISS reasoned that despite individual circumstances, annual votes would provide the most consistent channel of communication for shareholder concerns about executive compensation.

However, many boards of directors of early filers recommended triennial frequency to their shareholders, putting forth a litany of reasons against annual votes and for less frequent votes. Most noted that annual votes would exacerbate the tendency of shareholders to focus on short-term performance, and that less frequent votes would allow companies more time to thoughtfully prepare for and react to their shareholders’ advisory votes. Board recommendations for triennial say-on-pay votes enjoyed a comfortable lead early in the proxy season (with as much as 60 percent of boards recommending triennial say-on-pay vote). However, early shareholder meeting results showed overwhelming support for annual say-on-pay votes. Now, with a majority of companies with calendar fiscal years having had their shareholder meetings, it is evident that the annual say-on-pay advisory recommendation and votes have won this inaugural say-on-pay proxy season. Not surprisingly, small to mid-sized companies were more likely to receive shareholder votes favoring biennial or triennial frequency votes. Larger companies were more likely to receive shareholder votes favoring annual frequency votes.

Golden Parachute Vote

The golden parachute vote applies to any proxy filings that seek shareholder approval for certain transactions, such as acquisitions, mergers, asset sales and similar transactions for which SEC filings are required, and requires that shareholders be provided with a separate advisory vote on the golden parachute compensation arrangements covering named executive officers. Even in transactions that do not require a shareholder vote, companies were required to disclose golden parachute payments in filings, such as tender offers and going-private transactions.

Companies may avoid a separate golden parachute vote in their transactional proxy statements if the golden parachute arrangements were subjected to a prior say-on-pay vote; provided, however, that, if any golden parachute payments are adopted or enhanced after the prior say-on-pay vote, the new or enhanced golden parachute arrangements would need to be subjected to a vote in the transactional proxy statement.

It is not surprising that to date, because of the limited benefits of proactively subjecting executive golden parachute arrangements to an advanced say-on-pay vote, only a handful of companies have done so in advance of a transactional proxy statement.

To date, there has been no controversy with respect to the golden parachute vote. As of August 2, 2011, out of the approximately nine companies that have held shareholder meetings to approve transactions after the effective date of the golden parachute advisory vote rule, all nine companies have enjoyed passing votes from their shareholders for their executive golden parachute arrangements.

Say-on-Pay Vote

During the past few months, collective attention has shifted to the say-on-pay vote. For a while, executive compensation and governance experts were focused on the shareholder meeting voting statistics. From the beginning of the 2011 proxy season, the percentage of companies that did not receive a majority say-on-pay advisory vote from their shareholders remained at less than two percent, with more than 90 percent of companies receiving at least a 70 percent approval rate. But, behind the numbers were the real stories.

Proxy advisers, like ISS and Glass, Lewis & Co. (Glass Lewis) recommended against numerous companies’ executive compensation policies. As of July 28, 2011, ISS had recommended against company say-on-pay advisory votes in approximately 13 percent of the Russell 3000 companies’ proxies it reviewed. By some accounts, Glass Lewis’ against recommendations numbered higher. Such negative recommendations have been triggered by a variety of pay policies and practices that the proxy advisers have labeled as “problematic” or “egregious.” For example, ISS has recommended against company say-on-pay advisory votes for company executive compensation arrangements that included Internal Revenue Code Section 280G tax gross-up payments on golden parachute payments, single-trigger change-in-control payments or broad (so-called “liberal”) change-in-control definitions, “excessive” severance pay and “excessive relocation payments,” particularly including those with home-loss make-whole payments and related income tax gross-ups. However, the most prevalent and important basis for proxy adviser negative recommendations has been perceived “pay-for-performance” disconnects between the company’s financial performance and its pay to its executive officers — most importantly, to its CEO.

Many companies addressed negative ISS and Glass Lewis recommendations head on, by filing additional proxy materials prior to shareholder meetings to dispute. While most companies disputed the negative recommendations by challenging their pay-for-performance judgments (noting factual errors, weaknesses in the stock option valuation method and disconnects in proxy adviser peer group determinations), some companies amended their existing employment and equity agreements to induce ISS to change its adverse recommendations. Still other companies made prospective pay-for-performance commitments to subject a certain percentage of shares underlying named executive officers’ equity awards in future years to performance vesting.

Aside from the issues related to losing their say-on-pay advisory votes, companies that did not receive at least a majority say-on-pay vote, and even one company that received more than a majority say-on-pay vote, have also been subjected to shareholder derivative suits filed against their directors and executive officers, and in some cases, their independent compensation consultants firms. Although these shareholder derivative suits face substantial legal hurdles, these suits are distractions and may cause companies and their insurers to make settlement payments to the lawyers at relatively early stages in the proceedings to avoid the time and expense of trying them on the merits.


From its UK origins, say-on-pay is now a prominent fixture of the global corporate landscape. In the US, arguably the biggest say-on-pay scoop this proxy season has been the importance of proxy advisers’ recommendations and how vocal companies have been in responding to adverse recommendations. Due to the importance of proxy advisers’ say-on-pay recommendations and the difficulties companies had in engaging with shareholders on such matters between the short period of time from the proxy advisers’ issuance of reports to the shareholder meetings, it is imperative that companies engage with their important shareholders much earlier in the proxy season. Given that most large public companies have adopted annual say-on-pay votes to follow their shareholders’ advisory votes, companies will face these say-on-pay challenges annually, at least for the foreseeable future. Prior to the 2012 proxy season, public companies should review the outcome of their say-on-pay advisory votes and the reasons behind the outcome, evaluate whether executive pay at the company aligns with company performance, determine whether executive compensation policies should be revised in coming years and assess how to best explain the pay-for-performance alignment to shareholders in the upcoming proxy season.