February 24, 2011
Say-on-Pay: How to Respond to a “No” Vote
– Broc Romanek, CompensationStandards.com
Below is a Troutman Sanders memo that the firm recently sent out:
Despite your company’s best efforts, it lost its say-on-pay vote. What do you do now?
Every board of directors believes that its compensation policies and programs are appropriately designed to support the company’s goals, strengthen the company’s ability to attract and retain highly qualified individuals, and appropriately link pay to performance. A typical first reaction to losing the say-on-pay vote may likely be to ignore it or blame it on ISS or others who do not “understand” the company’s compensation policies and programs. “Denile,” however, is a river in Egypt, and is not an appropriate approach to proper corporate governance, and, with a “no” vote, shareholders have spoken and a company should listen and respond to their disapproval.
We believe the first step must be to determine the cause of the “no” vote. Was there a flawed pay package? Was it due to ISS’s erroneous views of the company’s performance versus its so-called “peers” (which we note often bear little relationship to the company’s real competitors)? Was it a communications problem – a CD&A that failed to tie compensation with performance – and/or a weak solicitation effort in the face of a more general cynicism toward executive compensation? Was it simply, as many of the “no” votes are, a proxy for a general dissatisfaction with the company?
Whatever the reason, meaningful action is appropriate and, while disclosure such as “we will take this vote into account in setting future compensation” is a typical start, it is unlikely to pass muster over the longer term. More difficult questions will need to be addressed, such as whether a change in composition of the compensation committee would inject fresh ideas into the compensation program and (perhaps more importantly) illustrate to shareholders that the company is taking the vote seriously. On the other hand, a company also must consider the ramifications of bowing to such pressure.
To date, ISS and Glass Lewis have not announced their plans for responding to “no” votes on say-on-pay proposals, and we are hopeful that they will study this issue carefully before responding prematurely. That said, we are realists and expect they will adopt policies recommending withholding votes or voting against members of a compensation committee (and possibly others as well) who are seen as unresponsive or ineffectual at addressing a “no” vote. This, combined with majority voting and, should it survive judicial review, proxy access could leave directors exposed to significant election challenges.
The bottom line is that when a company receives a “no” vote with respect to its executive compensation policies and programs, it should listen carefully to the message that is being delivered by its shareholders and respond substantively. Although extremely time consuming, we believe one-on-one meetings with large shareholders are often essential to allow you to get to the bottom of what’s really on your shareholders’ minds and take real steps toward addressing their concerns.