Section 951 of the Dodd-Frank Act requires advisory say-on-pay votes from shareholders on the compensation of named executive officers, the Compensation Discussion and Analysis, compensation tables and the other narrative disclosures required by Item 402 of Regulation S-K at least every three years. We first covered the major points of Section 951 in detail here. The say-on-pay vote is not binding on an issuer or its board of directors, although it is expected that proxy advisors will recommend withholding votes for the re-election of Compensation Committee members or board members of issuers that fail to make changes to executive compensation after a negative say-on-pay vote. While the say-on-pay vote must occur at least every three years, it may occur annually or biennially. The frequency of the say-on-pay vote will be determined by an initial shareholder vote (although the SEC interprets this as a non-binding vote), and a subsequent shareholder vote on say-on-pay frequency must be held at least once every six years.
The proxy card for the shareholder vote on the frequency of say-on-pay must include four choices: annual voting, biennial voting, triennial voting, and abstain. The board of directors may, but is not required to, make a recommendation to shareholders regarding the frequency of the say-on-pay vote. As proxy season approaches, issuers should be considering which frequency they will recommend to their shareholders, or if they will make a recommendation at all.
We expect board say-on-pay frequency recommendations will be driven by a number of factors. The recommendations of companies perceived by issuers to be peer companies will be significant, as no issuer will want to appear as an outlier. As usual, boards will likely give consideration to the preferences of shareholders that control significant voting blocks and have the power to affect change outside of the non-binding say-on-pay context. Boards may feel that their compensation structure is better suited to a particular frequency for say-on-pay voting– for example, perhaps boards will want to match the frequency of the say-on-pay vote to incentive performance cycles. In addition, the history of shareholder relations on executive compensation issues will likely be very important, as companies that have faced harsh criticism from shareholders or public scandal related to executive compensation may be inclined to recommend the annual say-on-pay vote, which provides shareholders with the most transparency and the opportunity to provide direct feedback.
In addition to the general considerations mentioned above, boards should consider the following points when deciding on the frequency that they will recommend.
- Institutional Shareholder Services (ISS) has indicated that it will likely recommend annual say-on-pay votes, and a number of institutional shareholders may prefer the annual frequency for similar reasons
- annual voting prevents issuers from playing it safe in voting years, saving unpopular or controversial decisions for years in which the shareholders won’t have a chance to express their dissatisfaction in a vote
- annual say-on-pay voting aligns shareholder feedback with management decision making – if compensation decisions are made on an annual basis, then it makes sense for say-on-pay to occur annually
- some issuers may treat an annual say-on-pay vote as a blocker that provides an outlet for shareholder dissatisfaction and prevents shareholders from expressing that dissatisfaction through negative votes for compensation committee members or negative votes on compensation components that require shareholder approval, such as an equity plan
- there is speculation that if say-on-pay votes are solicited every year, then perhaps shareholders will come to regard them as routine items that warrant automatic approval, akin to auditor approvals
- it has been suggested that the boards of most issuers will recommend either annual or triennial voting, as biennial voting dilutes the advantages presented by annual voting and by triennial voting
- biennial voting may nevertheless be the right choice for some issuers based on their specific circumstances
- there is a possibility that shareholders presented with three frequencies and wary of the board’s recommendation may default to biennial voting in the absence of strong feelings towards annual or triennial voting
- riennial voting minimizes the administrative burden and expense of administering the say-on-pay voting, as compared to biennial or annual voting
- as opposed to looking at a single year’s compensation decisions in isolation, a three year span allows the compensation policies to be contextualized in a way that may lessen negative perceptions held by shareholders
- triennial voting may be a good match for companies that use multi-year time horizons for performance incentives
- institutional shareholders may favor triennial voting because it reduces the frequency with which they must devote time and attention to their investment