The coming proxy season will center on the votes oncompanies' executive compensation plans that were mandated byDodd-Frank. The three years of say-on-pay votes to date haveresulted in a significant increase in companies' efforts to reachout to investors to assess their views—and, if possible, influencetheir votes.

Compensation “tends to be a hot-button issue for management,”said Laura Richman, of counsel in the Chicago office of law firmMayer Brown. “So just the existence of this advisory vote hasincreased shareholder engagement.”

With three years of experience with say-on-pay votes, “companiesunderstand the playbook in terms of doing their shareholderoutreach: that they need to do it earlier in the proxy process,”said Rajeev Kumar, senior managing director for corporategovernance and research at Georgeson, a proxy solicitation andcorporate governance consulting company. “They can't wait until[proxy advisers] ISS and Glass Lewis come out with theirrecommendations and then try to get shareholders not to go alongwith their recommendations. They need to do outreach far earlier,even before they have filed their proxies.”

In fact, most companies' say-on-pay measures sail to victory.According to Georgeson, such proposals averaged 90.3 percentsupport last year, up from 88.6 percent in 2012, and just 47companies in the Russell 3000 failed to win majority approval in 2013, versus 51 in 2012.

Richman noted, though, that while a failed vote generally refersto one that garners less than 50 percent approval, ISS interpretsapproval levels from 50 percent to 70 percent “as a strongindication of shareholder dissatisfaction with the compensationprogram.

“Just 50 percent doesn't get people all the way to where theywant to be,” she said.

And winning a high level of approval for its compensationpractices one year doesn't mean that a company can rest on itslaurels the next year, Richman said. Practices and opinions change,which is why keeping in touch with investors is important.“Companies have to be paying attention to how shareholders arelikely to react, which is why you will see engagement throughoutthe year,” she said. “If you have a spring meeting, and over thesummer you reach out to investors and see what their thoughts areand take those into account, you'll be able to have an evolvingmodel with this requirement of a vote in mind.”

Say-on-Pay Vote Tied to Relative Returns

The intersection of executive pay with the company's performanceis seen as a critical element in say-on-pay votes, but Georgeson'sresearch shows that total shareholder return relative to acompany's peers is a bigger factor than absolute return, Kumarsaid. “In fact, many of the companies that had a failed say-on-payvote had a pretty good absolute stock price performance.”

Smaller companies are more likely to fail to win majoritysupport than large companies, he said, attributing that fact tolarge companies' greater experience with shareholder engagement andgreater resources to support outreach.

The number of say-on-pay votes will jump this year, as companiesthat hold the vote on a triennial basis join those that giveinvestors a vote on pay every year. Georgeson estimates about 20percent of Russell 3000 companies have triennial votes.

“That just means institutional investors and proxy advisers aregoing to have less time for engagement on the issue this year,”said Richman. Companies should plan accordingly, she said, forexample by reaching out to investors earlier.

The proxy proposals put forward by shareholders this year ongovernance, compensation, environmental, and social topics areexpected to be similar to last year's.

“The independent board chair proposal was big last year, andlooking at what is pending this year, the independent board chairagain is appearing at a lot of companies,” Kumar said.

Additional ProxyProposals

While proxy proposals related tocompensation slowed in the first two years of say-on-pay votes,they picked up last year, said Kumar, who's pictured at left. Thetwo most popular were a measure that would prohibit acceleratedvesting of options and another aimed at encouraging executive stockretention. “Those two accounted for almost 75 percent ofcompensation-related shareholder proposals last year,” he said. “Weshould see the same compensation-related proposals show upagain.”

Proposals on “lobbying and political contributions are big,”Richman said. “You probably see more of those at the large-capcompanies, but things do filter down to the midcap.” She added thatsome proxy proposals that used to be targeted mostly at largecompanies, such as those seeking majority voting for directors, arenow being proposed at midcap companies.

Kumar cited two new types of proxy proposals he has seen thisyear. One is related to proxy voting and asks “that companies don'thave access to the running tallies of how the proposals are doingso that they can't try to influence the vote outcome,” he said.Those proposals follow a furor last year when JPMorgan faced aproposal for an independent chair and a Wall Street lobbying groupasked the organization compiling the votes not to disclose runningtallies to the sponsor of the proposal.

“The other [new] proposal stems from the SEC'sproposed rule relating to CEO pay ratio,” Kumar said. “There have been proposalsrequesting that the company limit executive pay to 99 times or 100times the median worker [pay].”