Following the SEC's new proposed rules on Shareholder Say on Pay (SSOP) and Shareholder Say on Parachute Compensation (SSOPC), one of the current hot topics for the upcoming proxy season and SSOP vote is what the Company's Board should recommend for the frequency of SSOP. Remember, the SEC's proposed rules provide that issuers must give shareholders four choices:
- The shareholder vote on executive compensation will occur every year.
- The shareholder vote on executive compensation will occur every two years.
- The shareholder vote on executive compensation will occur every three years.
The Board may make a recommendation as to how shareholders should vote on the frequency of SSOP votes, just as it does with other proposal put to shareholders for a vote. How should the Company/Board recommend that shareholders vote on the frequency of SSOP votes? Nearly everyone's initial, instinctive reaction is: not every year. Arguments in favor of a less frequent vote are that it:
- Gives the Company more time to understand the vote and respond to the voting results,
- Aligns more closely with multiyear performance cycles,
- Allows proxy advisers to make more informed decisions and recommendations, and
- Gives the Comp Committee a breather every other year.
However, executive compensation professionals (including my fellow bloggers) are starting to make arguments in favor of an annual SSOP vote (in addition to the fact that ISS and the other shareholder advisory firms may demand it). The primary argument is that if the Company offers [proxy statement contains] the SSOP vote every year, then ISS and other shareholder advisers will focus on that vote as a potential means of expressing their dissatisfaction as to executive compensation or other matters. However, if ISS and others cannot express their dissatisfaction through SSOP, they are much more likely to focus on and recommend a vote against directors running for re-election. And that vote is legally binding (unlike SSOP, which is merely advisory).
A less subtle argument in favor of an annual SSOP vote is that, if the SSOP vote appears on the proxy statement every year, after a time it will become like ratification of the auditors, routine or "white noise," and most shareholders will reflexively vote in favor. I am not sure I find this argument persuasive, since every proxy statement now includes an election of directors, and shareholders – especially institutional shareholders and their advisers - certainly don't ignore that.