Which Way on Say-on-Pay?

How companies plan to hear shareholder opinions on compensation.

While they are not yet mandatory, and won’t be until 2011 at the earliest, say-on-pay provisions are nonetheless being adopted by a growing number of companies. In 2008 a mere 6 companies voted to give shareholders an advisory vote on executive compensation; at press time, 56 planned to put the matter up for vote this year or next, according to a tally by corporate-governance advisory firm RiskMetrics Group.

Exactly which form of say-on-pay to put up for vote, however, remains a matter of debate. The basic model is to ask for an annual yes or no vote in the proxy. But some companies, including General Mills, Prudential, and Microsoft, offer votes every second or third year, in part to align with the timing of long-term incentive packages. Others, like financial services firm MBIA, ask about CEO compensation separately from compensation for other executives. Still others, like Amgen, Lockheed Martin, and Northrop Grumman, don’t offer a formal vote but solicit opinions on various facets of their compensation programs through shareholder surveys.

While say-on-pay votes would be nonbinding, Maureen Thompson, executive director of investor advocacy group Shareowners.org, says such votes will “make board compensation committees more careful about doling out rich rewards to underperforming CEOs.”

One thing is clear: whichever approach a company takes won’t please everyone. Paul Hodgson, senior research associate at The Corporate Library, a governance monitoring firm, believes that a binary vote is sufficient, since shareholders can make it clear through the annual meeting what they object to, but that such votes should be held every year. Otherwise, he says, “the year a company doesn’t have a vote could be the year it tries to slide something through that it knows shareholders would not approve of.”

Others, including Arthur Kohn, a partner in law firm Cleary Gottleib’s executive-compensation practice, are advising clients to aim for every third year. “Companies have a very hard time understanding what the message means in the first place: Are shareholders reacting to particular elements of the packages, the overall compensation philosophy, or something else entirely?” Kohn asks rhetorically. “Having the vote every three years virtually dictates it be a vote on compensation philosophy” rather than non-pay-related management issues.

Companies that have yet to put the issue on their dockets may be well advised to initiate or continue informal dialogues with shareholders. Mandatory annual say-on-pay was included in the bill that Sen. Christopher Dodd (D–Conn.) unveiled last month, and it closely echoes a bill that passed the House of Representatives last year. The good news for companies? So far, shareholders have approved virtually every compensation package that has come up for a vote, usually by a strong majority.

Companies that moved to offer shareholders an advisory note on executive pay in the past 6 months

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