From the February 2011 issue of Treasury & Risk magazine

A Say on Voting on Pay

As annual meeting season begins, shareholders will experience something new: a choice. The vote on the frequency of future say-on-pay reviews, which Dodd-Frank mandates every public company include on its agenda this year, will give shareholders four options: voting on say on pay every three years, every two years, every year or "no opinion." "This is the first time in history that investors have had a multiple-choice vote," says Tim Smith, senior vice president at Walden Asset Management.

Walden and other institutional investors have been pushing companies to let shareholders review executive pay every year. Smith says with the Dodd-Frank requirement, it's looking as if this could be the year that happens.

So far, however, according to Institutional Shareholder Services (ISS), which advises institutional clients, half of the companies that have announced their recommendations so far are supporting the three-year option.

Gary Hewitt, head of marketing and communications at ISS, says only a third of companies whose proxies he has seen to date are recommending an annual vote. "Our institutional clients have told us they favor annual votes," Hewitt says. "It's going to be interesting to see what happens."

Similarly, a survey of 62 proxies by compensation consulting firm Steven Hall & Partners found 53% are recommending a vote every three years, 23% are recommending an annual vote and 14% a vote every two years. Ten percent didn't make a recommendation.

Walden's Smith questions what companies pushing for three-year reviews will do if that frequency wins only a plurality of votes, but not an outright majority, with the majority opting for either annual or biennial votes. "Will they get the message, or will they just go ahead and go with three years?" he asks. The SEC has ruled that with a multiple-choice ballot, a plurality wins.

The votes are only advisory, but companies that are outvoted and ignore the results could be asking for trouble. "If a company loses on say-on-pay and then says, 'Well, OK, but we don't care,' the discussion could start getting very intense," Smith says.

Michael Rave, a partner at the law firm Day Pitney, says he's advising that companies "avoid doing anything contrary to what shareholders recommend, because it will be looked at most likely by ISS.

"If companies have questionable pay practices, they may only want to have say-on-pay votes every three years," Rave adds. "But we find that in general, voting on the issue every year is not a big deal, especially for those firms whose practices are not frowned on by ISS."

For more on new requirements related to compensation, see Spotlight on Executive Pay.


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