The Advisors' Blog

– Francis Byrd, The Altman Group

To date, there have been 637 Say on Pay proposals brought forth by management, which is almost a 20% increase from 2009 when there were 518 as of this time last year. These figures include firms that participated in the TARP program and were required to place SOP management proposals in the proxy and a number of companies who chose, in response to resolutions from activist institutional investors, to adopt SOP for submission to stock owners.

The majority of firms submitting SOP proposals to their shareholders this year have, thus far, experienced high ratification votes with overwhelming support in the high 90 percentiles. A serious caveat that boards and senior managers need to keep in mind is that the SOP proposal is presently a routine item under NYSE rules, allowing brokers to vote uninstructed client’s shares in favor of the SOP resolutions. A provision in the bill approved by the Senate would make SOP proposals a non-routine item and as is now the case with director elections – brokers would not be able to vote clients’ shares for management SOP proposals.

As we see it, under a mandatory SOP regime – without the safety net provided by the broker vote – companies will have a much more difficult time getting a high percentage approval vote from shareholders for executive compensation advisory votes. According to impact analyses we conducted on the effects of NYSE Rule 452 on companies with a significant retail shareholder base (20% to 60%), they could expect a drop off in the range of 10% to 44% in voting for directors.

Putting this into the Say on Pay context, issuers should expect to see a similar and sizable decrease in the percentage of support for these management proposals in 2011. Issuers would be strongly advised to also consider the results of the KeyCorp, Motorola and Occidental SOP votes (which failed to achieve majority support) when thinking about the exclusion of broker votes effect upon SOP proposals going forward.