Say on Pay Leading to Better Communication About Compensation

Editor’s Note: Mary Schapiro is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Schapiro’s remarks to TheCorporateCounsel.Net “Say-on-Pay Workshop Conference”, which are available here. The views expressed in the post are those of Chairman Schapiro and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Executive compensation has long been an area of intense interest for shareholders, corporate boards, CEOs, senior executives – and to the SEC.

But, at the SEC, our interest is different from that of other stakeholders. It’s not rooted in any opinion regarding the level of compensation a corporate executive might receive. That is for companies and shareholders to discuss.

Rather, our interest is in ensuring that in this matter – as in other areas of corporate governance – the shareholders who own a company receive the information they need to make an informed judgment, and that they have a vehicle through which they can express that judgment to the board.

I believe that effective communication between shareholders and boards is a cornerstone of good governance.

But, in the years leading up to Dodd-Frank, there was a feeling that the conversation between shareholders and boards regarding executive compensation was unsatisfactory. We heard complaints that the compensation disclosures provided investors were too dense to penetrate, too complex to analyze and too obtuse to persuade. In fact, we were under noticeable pressure to force clearer disclosure through the rulemaking process.

I am pleased to report today, then, that it appears that the say-on-pay regulation put in place through Dodd-Frank is leading to improvements in communication in both directions. It has given shareholders a clear channel to communicate satisfaction – or lack of satisfaction – with executive compensation practices to their boards. And it is giving boards a powerful incentive to clarify disclosure to shareholders, and to make a clear, coherent case for the compensation plans they have approved – and to do this without the SEC adding another layer of disclosure regulation.

While the SEC expects to propose additional compensation disclosure rules in the near future, that are required by Dodd-Frank, I believe that the baseline say-on-pay regulations are already having a beneficial effect on compensation disclosure practices at public companies, and provide a benchmark against which to measure progress as other rulemakings proceed.

The say-on-pay voting requirements in Dodd-Frank were designed to be effective for the 2011 proxy season. But Congress did not set a deadline for Commission action. We believed, however, that it was important to provide compliance guidance to companies before proxy season, and to act aggressively to limit confusion during say-on-pay’s critical first year. And so we adopted final rules on January 25th.

As this group knows well, the rules require companies to provide shareholders with an advisory vote on executive compensation at least once every three years. The rules also require an advisory vote on the frequency of say-on-pay votes at least once every six years.

In addition, companies must provide a separate advisory vote regarding certain “golden parachute” arrangements in connection with a merger, acquisition, or other disposition of all or substantially all, assets.

The outcomes of these votes are not binding on the company or its board of directors, and they do not affect the validity of executive officer compensation arrangements. The advisory vote does, however, let boards know what shareholders think of compensation arrangements.

Companies are required to quickly report on Form 8-K the results of these votes, and I know that there is tremendous interest in the outcome of these votes.

In addition, companies have to report the decision on the frequency of say-on-pay votes.

And, going forward, companies will have to disclose in proxy statements, in the year following the vote, how they have responded to the most recent say-on-pay vote. This will provide another set of data points for investors, as they observe how their vote was regarded and acted upon by the board and the company’s executives.

Some companies appear to have found the say-on-pay vote requirement challenging. Few compensation packages were actually rejected. According to and, approximately 40 companies received negative votes. But even in many cases in which shareholders approved the board’s compensation strategy, a significant percentage of shareholders voted “no.”

Corporate governance consultant ISS has reported that, as of the beginning of August, more than 30 companies had received only 50 to 60 percent support for their pay practices. And litigation has followed several negative say-on-pay votes.

It is my hope that a “no” vote or even a significant vote against a company’s executive compensation practices will force boards to ask themselves some very tough questions.

Questions like:

  • Should executive compensation policies be altered in response to the vote?
  • Has the board’s executive compensation philosophy been clearly articulated to shareholders?
  • How should the board engage with shareholders in response to the vote?
  • Who should the board consult with in connection with responding to the vote?
  • Substantively, what should the Board consider changing about its compensation plans?

And I am heartened to see that companies filing proxy statements following say-on-pay votes are in fact responding to these issues. Compensation does not necessarily have to change in response to a significant negative vote, but a re-examination of executive compensation is a healthy exercise.

Another trend to emerge from this proxy season is that of shareholders choosing to hold advisory votes every year. This shows that shareholders want boards to maintain a focus on executive compensation. They recognize the importance of compensation as an incentive for positive performance. But they also recognize that compensation policies can incentivize risk-taking that subject companies to significant exposure – much of which may not have been adequately considered by boards.

Shareholders want boards to be on top of this, and an annual vote can be a powerful tool in this regard.

They also want companies and compensation committees to better convey their thinking regarding calibration and structure of senior executives’ compensation packages. I think this is a good thing. And I know from talking with my staff that they think this is a terrific development as well.

We share a hope that this trend towards more effective communication regarding executive compensation will continue and accelerate.

We would be very pleased if market forces – the desire to persuade shareholders that they should vote “yes” in the say-on-pay vote – caused companies to continue to improve their executive compensation disclosures, eliminating the pressure for further SEC rulemakings in this area.

And, as are many shareholders, we are also looking forward to disclosure of compensation committees’ response to the prior year’s say-on-pay vote, and learning how those votes affect compensation policy.

While say-on-pay is the most visible SEC compensation initiative, there are a number of additional, related rulemakings in the pipeline.

We understand that many companies have concerns about the role of advisory firms in the proxy process, including the influence of their voting recommendations and potential conflicts of interest.

We understand, as well, that these concerns have become more acute with say-on-pay voting. A number of companies have called on the SEC to improve the regulation of these firms.

We, too, consider the role of proxy advisory firms an important issue and – as you know – one that we made a significant component of last year’s “proxy plumbing” concept release.

Currently, the Staff is working on recommendations pertaining to proxy advisory firms and, while I can’t guarantee our timing in light of all that we have on our plate, I hope we can address concerns over their role, including disclosure of conflicts of interest and the information upon which they base recommendations, by the end of the year or early in 2012.

We proposed a Dodd-Frank compensation-related rule — listing standards governing compensation committees and their consultants and other advisors – earlier this year. After we adopt our final rules – in the next few months, I expect – the exchanges will implement them by proposing and adopting new listing standards consistent with our rules. We got very helpful comments on our proposal, which as you know, adhered closely to the statutory mandate.

There are also four remaining Dodd-Frank Act rulemakings relating to governance and compensation matters: pay ratio, pay-for-performance, claw-backs, and employee hedging of company stock. We recognize that the requirements contained in some of these rulemakings may be costly and complicated for you to implement, and we are interested in ways of implementing these requirements in a practical manner. As we move forward, however, please keep in mind that the statutory framework for these rulemakings is, in some cases, quite prescriptive. As with all other aspects of Dodd-Frank implementation, we have made outreach to stakeholders a linchpin of our rulemaking efforts. I encourage you to reach out to us as we work to complete our Dodd-Frank requirements and to address other issues of concern.

While Dodd-Frank does not assign a deadline for these four rulemakings, we hope to propose them by the end of the year or early in 2012, and again, we will need your input and advice on our proposals.

There is no single way to run a successful enterprise. Different companies have differing personalities and strategies, and they follow a variety of business and governance models. The SEC understands this, and avoids regulation that would put us in the position of passing judgment on any of these approaches.

However, given our role as what legendary SEC Chairman William O. Douglas called “the investors’ advocate,” we do believe that robust and effective communication between boards and shareholders is both a fundamental principal of corporate governance and an important contributor to business success.

Our goals in say-on-pay and other compensation initiatives are to ensure:

  • Shareholders receive the timely and accurate compensation information they deserve as a company’s owners.
  • This information is presented in a way that allows shareholders to make informed judgments.
  • Shareholders have a channel through which to communicate their views to the board and to senior corporate officers.

I am hopeful and encouraged, that say-on-pay appears to be speeding progress toward these goals. We look forward to your help in crafting our other compensation rulemakings in such a way that they, too will bring the benefits of increased communication to investors and to the companies they own.

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