“Say on Pay,” the advisory shareholder votes on public company executive compensation mandated by the Dodd- Frank Act, turned three earlier this year. The verdict thus far: these shareholder votes, while not officially binding on public companies or their directors, have served to bring attention to the issue of executive pay generally. However, they have not resulted in a material number of rejections of board decisions.

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Results have been largely consistent over the past three years: in 2013, 2 percent of Russell 3000 companies with a “Say on Pay” vote before shareholders failed to win approval, while the percentages of companies with negative “Say on Pay” votes in 2011 and 2012 were 1.4 percent and 2.6 percent. In the “glass is half full” category, 78 percent of companies with a successful “Say on Pay” vote in 2013 passed with over 90 percent approval (with 93 percent of such companies passing “Say on Pay” with over 70 percent approval).

Companies that have had negative “Say on Pay” votes in the past three years have tended to share similar characteristics: a disconnect between executive pay and company performance, weakness of performance goals applicable to whether an executive earns his or her performancebased compensation, and problematic pay practices (such as excessive reliance on time-based vesting of incentive awards).

According to Equilar, an executive compensation research firm that regularly monitors “Say on Pay” voting, companies with negative “Say on Pay” votes do not perform as well financially as those companies with successful “Say on Pay” results. These companies have lower one-year total shareholder return, revenue and market capitalization, and a decrease in year-over-year earnings compared to companies with successful “Say on Pay” results.

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However, because the failure rate for “Say on Pay” votes is so low, the votes at most companies have become ratifications of existing compensation levels and practices. While the implementation of “Say on Pay” was intended to bring focus on public company executive pay practices and curb what were perceived to be the worst excesses, it has not put a damper on the annual growth rate of executive pay. The total compensation paid to public company CEOs increased 6.0 percent in 2011 and 6.5 percent in 2012.

“Say on Pay” and the attention it brings to executive compensation issues have increased the focus of public companies on having a justifiable and rational process for determining compensation levels for their top executives. Public company compensation committees are keenly aware of the public scrutiny their decisions will receive and now spend significant time and effort in administering the compensation process and justifying their decisions in their annual proxy disclosures.

Our View

The reality of executive compensation at public companies appears to be that top executives will command the pay that the market will bear, both on a peer-to-peer basis and in terms of adverse shareholder reaction. It is a rare shareholder that would divest from a profitable, market- leading company solely to make a principled statement on the fairness of compensation paid to a company’s top executives. Public company directors should have little to fear from “Say on Pay” votes if they are conscientiously executing their duties in setting and monitoring executive pay with the best interests of the company in mind and the goal of maximizing shareholder value.

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