Say On Pay: Analyzing The Second Year Of Shareholder Votes

Saturday, June 23, 2012 - 12:19
Jeffrey M. Stein

Jeffrey M. Stein

Laura O. Hewett

Executive compensation levels at public companies have been the focus of media headlines for a number of years. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) requires that public companies conduct shareholder advisory votes on executive compensation, generally known as a “say on pay.”[1] These required votes commenced in 2011.[2]

Public companies are required to provide shareholders with a say-on-pay vote at least once every three years, and most companies have determined to provide shareholders with this vote on an annual basis. Securities and Exchange Commission (SEC) rules also require companies to disclose in the Compensation Discussion and Analysis (CD&A) section of the proxy statement whether or not and, if so, how the company considered the results of the most recent say-on-pay vote.

While the results of say-on-pay votes are not binding on a company and do not require a compensation committee to undertake any changes in its compensation programs, the votes are considered important by many institutional investors. A loss can result in a company being the subject of media headlines and the unwelcome attention that this brings. Even if a say-on-pay vote passes but receives a significant number of votes against, a company will be subject to scrutiny with respect to its compensation practices.

With most large public companies now having conducted say-on-pay votes in 2011 and 2012, it is instructive to review the votes and consider the lessons that can be learned.

Say-On-Pay Voting Results In 2011 And 2012

Despite the media headlines and the concerns of many in-house counsel leading up to the first round of mandatory say-on-pay votes in 2011, results were overwhelmingly positive.

  • Public companies received an overall average of 92 percent support for say on pay in 2011.
  • Approximately 45 companies failed to achieve majority support for the vote, which amounts to less than 2 percent of companies.
  • Approximately 6 percent of companies received support in the range between 50 percent and 70 percent of the vote (or, thinking about it a different way, had at least 30 percent of shareholders vote against say on pay). While these were passing votes, the proxy advisory firm Institutional Shareholder Services (ISS) considers this lower level of support as raising significant issues with respect to a company’s compensation program, and will subject that company’s compensation program to additional scrutiny in the following year.

Results of the say-on-pay votes in 2012 (through June 15, 2012) have continued to be overwhelmingly positive.

  • Public companies have received an average of 91 percent support for say on pay in 2012.
  • Approximately 52 companies have failed to achieve majority support for say on pay. While this number already exceeds the total number of companies that lost the vote in 2011, it still amounts to only 3 percent of companies.
  • Approximately 6 percent of companies have received support of between 50 percent and 70 percent of the vote.
2012 Turnaround For Companies That Lost The Vote In 2011

For companies that lost the say-on-pay vote in 2011, results in 2012 have proved to be significantly different. Of the 26 companies that lost the vote in 2011 and had disclosed the results of their 2012 annual meeting by June 15, 2012, 23 companies won the say-on-pay vote in 2012, with 14 of those companies achieving support exceeding 90 percent. For example, Jacobs Engineering Group, Inc., which received only 45.5 percent support in 2011, achieved 97.9 percent support for say on pay in 2012 - a striking turnaround.

What did these companies do to achieve the improved outcomes in 2012? In each case, the company described in the CD&A in its 2012 proxy statement the changes it had made in its compensation program over the past year. Disclosure was carefully crafted and typically explained what the company did to respond to the negative vote, described how representatives of the company contacted shareholders to determine the trigger for the negative vote, and conveyed the changes the compensation committee made in the overall compensation program or to specific problematic pay practices to address the concerns identified by shareholders. This disclosure was detailed, often exceeding a page in length.

Impact Of Proxy Advisor Recommendations

In both 2011 and 2012, the recommendations of the proxy advisory firms (ISS and Glass, Lewis & Co.) had significant impacts on both the outcome of say-on-pay votes and on company responses to the votes.

Looking at the 2011 say-on-pay votes at S&P 500 companies, ISS recommended for about 87 percent of companies and against about 12 percent of companies. Nevertheless, 92 percent of the S&P 500 companies that received a negative recommendation from ISS went on to secure the approval of shareholders, while only 8 percent ultimately lost the vote.

In 2011, for companies receiving positive recommendations from ISS, overall average shareholder support was 93 percent, with this support dropping to 66 percent for companies receiving a negative recommendation. In other words, a negative recommendation from ISS correlated with a greater than 25 percent reduction in support. Tellingly, every S&P 500 company that lost the vote in 2011 received a negative recommendation from ISS.

The results are similar for 2012 annual meetings. For S&P 500 companies, ISS has recommended for say on pay at about 86 percent of companies and against at about 14 percent of companies. In 2012, 16 percent of S&P 500 companies that received a negative ISS recommendation lost the vote, while 84 percent prevailed against the recommendation. ISS’s influence among the S&P 500 also continued at a similar level in the first half of 2012, with 94 percent shareholder support for companies receiving a positive recommendation, and 61 percent support for companies receiving a negative recommendation.

As mentioned above, ISS takes the position that shareholder support under the 70 percent level raises significant issues with respect to executive compensation. Even for companies that won the vote, if they received negative votes from at least 30 percent of their shareholders, ISS will closely evaluate the company’s proxy statement in the next year to determine what steps the company took to determine the cause of the dissatisfaction and what actions it took to remedy the concerns.

Company Reactions To Negative Vote Recommendations In 2011 And 2012

Because of the likely significant negative impact of a recommendation against say on pay from a proxy advisory firm, companies receiving a negative recommendation have taken various approaches immediately upon learning of the recommendation. Time is tight, as companies typically have only about two weeks between the proxy advisor recommendation and the date of the annual meeting to secure the necessary shareholder vote.

The reasons most frequently cited by the proxy advisors in voting against say on pay in both 2011 and 2012 were (a) a pay-for-performance misalignment and (b) poor pay practices. In the pay-for-performance analysis done by the proxy advisors, the company’s stock price performance and compensation is compared to a peer group constituted by the proxy advisor, which often differs significantly from the peer group used by the company’s compensation committee. Companies often argue that the peer group used by the proxy advisor is flawed. A poor pay practice may be easier to remedy if a company is willing and able to amend an employment or severance agreement to eliminate a tax gross-up or amend an outstanding equity award to add performance vesting conditions.

Companies often initially engage directly with ISS in an effort to persuade ISS to change its recommendation or to determine what actions the company must take to cause ISS to change its recommendation. Although rare, there are instances in which ISS has changed its recommendation based on specific actions taken by companies in advance of the shareholder meeting. For example, several companies have successfully managed to change a recommendation by adding performance goals to equity awards or eliminating tax gross-up provisions in employment agreements between the time of the ISS recommendation and the date of the annual meeting.

Many companies also engage with their large shareholders to make the case for why shareholders should support the company’s compensation program and to argue that ISS made errors in its analysis or drew the wrong conclusion. Although there are some institutions that are required by their internal guidelines to vote in accordance with a proxy advisor’s recommendations, many institutions review the proxy reports and recommendations but make their own voting decisions. Companies may prevail against a negative recommendation if they are able to reach shareholders that exercise independent voting authority and articulate compelling reasons for the shareholder to support the say-on-pay vote.

There is also a growing trend for companies to publicly rebut a negative ISS recommendation through filing additional soliciting materials with the SEC that make the company’s argument as to why the company believes its pay practices are appropriate and how and why ISS got it wrong. Already in 2012, more companies have filed these public rebuttals than in all of 2011. After filing these materials with the SEC, companies typically launch multifaceted communications campaigns using proxy solicitors and their own officers, and sometimes even their compensation committee members, to secure the support of their shareholders. One unique approach taken by a public company in 2012 in response to a negative ISS recommendation was to immediately schedule a webcast to rebut the recommendation, make the company’s case and respond to shareholder questions about executive compensation.[3]

2012 CD&A Disclosure About 2011 Say-On-Pay Results

SEC rules require companies to disclose in their CD&As whether, and if so, how, the company considered the results of the most recent say-on-pay vote. Further, proxy advisors expect companies that received a significant negative vote from shareholders to describe the steps the company has taken to engage with shareholders to identify the cause of the negative votes.

For companies that secured at least 70 percent shareholder support in 2011, the disclosure included in the 2012 CD&A was typically a paragraph or so in length. These companies noted the strong level of support and stated that the compensation committee continued to apply the same policies for the ensuing year.

For companies that lost the vote in 2011, the 2012 CD&A typically described in detail what actions the company undertook to determine the cause of the negative vote and the changes the compensation committee made in the overall compensation program or to specific problematic pay practices to address the concerns identified by shareholders.

For companies that had support in the 50 percent to 70 percent range, even though the advisory say-on-pay vote passed, the CD&A disclosures looked very similar to those of companies that had lost the vote.

Improving A Company’s Say-On-Pay Vote Support

While overall support for say on pay has been strong in both 2011 and 2012, most public companies want to improve their shareholder support year over year or at least ensure that they maintain a consistent level of support. In addition, smaller reporting companies will have a say-on-pay vote for the first time beginning in 2013. Companies should consider the following action items as they begin to plan for their 2013 say-on-pay votes:

  • Work with your investor relations team and/or your proxy solicitor to determine the large shareholders who did not support say on pay in your most recent vote.
  • Undertake a shareholder outreach program to determine the cause of any negative vote well in advance of the next proxy statement.
  • Review the proxy advisor reports and consider addressing identified pay for performance disconnects and problematic pay practices.
  • Consider adopting changes to compensation programs to address shareholder and proxy advisor concerns.
  • Analyze the makeup of your shareholder base, and know your company’s exposure to proxy advisor voting recommendations.
  • Ensure that the company’s compensation story in the proxy statement is clear and highlights any company’s shareholder outreach and the positive steps taken by the company to address concerns about compensation practices. Consider the CD&A as an advocacy piece.

[1] Dodd-Frank also requires that companies provide shareholders with an advisory vote on their desired frequency for the say-on-pay vote, with a choice of every one, two or three years for the say-on-pay vote. This separate frequency vote is generally known as a “say when on pay.”

[2] Issuers that qualify as smaller reporting companies under SEC rules (public float of less than $75 million) were provided a two-year exemption from the implementation of the say-on-pay vote. These companies are required to conduct say-on-pay votes with annual shareholder meetings beginning on or after January 21, 2013.

[3] Exxon Mobil Corporation held a webcast on May 16, 2012, and filed the slides as additional soliciting material. The company’s say-on-pay vote passed with 77.8 percent support.


Jeffrey M. Stein is a Partner in the Atlanta office of King & Spalding LLP, practicing in the Corporate Practice Group. Laura O. Hewett is Counsel in the Atlanta office’s Corporate Finance Practice Group.

Please email the authors at or with questions about this article.