Executive Comp: Say When

Companies are pushing back on the say-on-pay mandate by asking shareholders to stretch out the time between votes.

CFOs’ compensation packages will be exposed to shareholders’ scrutiny next year, thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which imposes mandatory advisory votes on publicly traded companies. But how often investors get their so-called say on pay will depend on another vote they will make during the upcoming proxy season.

If the few proxy statements submitted so far for 2011 shareholder meetings are any indication, companies prefer that investors get their say the fewest times possible — once every three years — rather than have an annual or biennial vote.

For annual meetings held on or after January 21, 2011, shareholders will vote on whether they should exercise their say-on-pay right every year, every two years, or every three years. Like the actual say-on-pay vote, these decisions are nonbinding. (Under Dodd-Frank, companies must query investors on their frequency preference every six years.)

As of December 16, only 28 companies required to have the say-on-pay vote next year have filed their proxies, and nearly half of them are recommending a triennial vote, according to Mark Borges, principal at consultancy Compensia. While it’s too early to draw conclusions based on this small pool of companies, Borges says it’s surprising that most of them — knowing they would be early filers — have chosen the least-conservative recommendation. As other companies finish their fiscal year-ends and begin drafting their own proxies, “some of them may feel a little more comfortable doing the same thing,” he says.

Executive-compensation observers say companies will likely recommend voting frequencies that they believe will result in the least amount of controversy. An annual vote could make the matter routine, similar to shareholders’ regular ratification of external auditors. But it could also expose a company’s pay packages to unwelcome attention year after year, particularly if the company has poor performance and questionable compensation policies. “If you end up making adjustments every year, that’s adding more noise in the system,” says Stephen Quinlivan, an attorney at Minneapolis law firm Leonard Street and Deinard.

In their proxies, companies give other reasons for making a triennial recommendation (if they provide any explanation at all). For example, Johnson Controls says such an infrequent vote would more closely match the multiyear cycle it uses to measure executives’ performance.

Other companies, such as gas provider New Jersey Resources, are pushing for an annual vote because they fear that a less-frequent vote would make interpreting investors’ decisions more difficult: which span of time would a triennial vote be criticizing? “Providing the vote only every two or three years may prevent shareholders from communicating in a meaningful and coherent manner,” the company wrote in its proxy.

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