Say on Pay: What the 2015 Shareholder Vote Reveals
When President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law in July 2010, this major legislation also included provisions under Section 951 of the law to be implemented by the U.S. Securities and Exchange Commission (SEC). Adopted by the SEC on January 25, 2011, were two rules addressing "say-on-pay" shareholder votes and the frequency of such votes. The say-on-pay rule requires publicly traded companies subject to proxy rules to offer their shareholders an advisory vote on the compensation of the company's most highly compensated executives. Under this rule, say-on-pay shareholder votes must be held at least once every three years, e.g., every year, every second year, or every third year, and shareholders may approve, disapprove of abstain when voting, while frequency votes must be held at least once every six years.
The SEC required say-on-pay and frequency votes to be held at annual shareholder meetings beginning on January 21, 2011, for companies with a public float of more than $75 million, and for companies with less than a $75 million public float beginning on January 21, 2013. The shareholder say-on-pay vote on the top executives' compensation include the chief executive officer (CEO), the Chief Financial Officer (CFO) and at least the next three most highly compensated executives. The language used in the say-on-pay ballot is not specified by the SEC, so each company has flexibility in crafting the language of the non-binding resolution. Previously, those companies receiving Troubled Asset Relief Program (TARP) money were required to annually hold a say-on-pay vote at annual shareholder meetings until they paid back all the money they borrowed from the federal government.
Executive compensation consultants Steven Hall & Partners, of New York City, have reported company say-on-pay voting results held in calendar year 2015 (data as of December 18, 2015, effectively the end of the year for annual shareholder meetings). With 2,887 companies holding say-on-pay shareholder votes in 2015, all but 69 companies received greater than 50 percent approval of their votes, resulting in a 2.4 percent "failure" vote. This result was quite similar to the results that Steven Hall & Partners reported for calendar year 2014, where, among 3,442 companies holding a say-on-pay vote, 66 companies failed to receive more than 50 percent approval of the ballot, resulting in a 2.0 percent failure rate. Moreover, the average "passed" vote on the say-on-pay ballot in 2015 was 91 percent for, 7 percent against, and 1 percent abstain (rounding error), which compares quite closely with the average "passed" vote for 2014, with 90 percent for, 8 percent against, and 2 percent abstain. For average "failed" votes in 2015, 38 percent voted in favor, 60 percent against, and 1 percent abstain (rounding error), again quite close to the average "failed" votes in 2014, where 39 percent voted in favor, 59 percent against, and 2 percent abstained.
While the shareholder say-on-pay votes are non-binding, they are a "lightning rod" for discontented shareholders with a broad array of complaints, and company executives (and boards of directors) often are under shareholder pressure to change pay practices when a significant minority of shareholders vote "no." The percentage (by range) for those voting in favor of the say-on-pay ballot in 2014 among all companies reporting is 71 percent (greater than 90 percent), 21 percent (70 to 90 percent), and 6 percent (50 to 70 percent), with 2 percent abstaining. Interestingly, in 2015, the percentages for say-on-pay votes for all reporting companies remained identical for all percentage ranges (and abstentions). The so-called "gold standard" of shareholder approval for the say-on-pay vote is greater than 90 percent approval. When the approval vote falls below the 90 percent threshold, this result is usually construed by management as a "significant" minority of non-supportive shareholders expressing discontent - with a company say-on-pay approval vote below 70 percent of grave executive and director concern.
Institutional Shareholder Services Inc. (ISS), one of the world's leading providers of corporate governance solutions for asset owners, recommended during calendar year 2015 that shareholders vote against say-on-pay at 12 percent of 2,016 companies it had assessed. The actual result for 2015, a 2.4 percent "failure" vote (among a larger total of 2,887 companies reporting), is nevertheless in stark contrast to the ISS company recommendations. In fact, the 2015 say-on-pay vote results continue the routine shareholder endorsements of executive compensation packages ranging between 97 and 98.5 percent annually since 2011. One conclusion, however, is inescapable: it appears that five years of U.S. company data on shareholder say-on-pay voting has not verified what many shareholder activists originally believed when the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law - that most shareholders held similar personal opinions about corporate executives being significantly overpaid for their managerial performances.
