As the 2012 proxy season draws to a close, it is clear that executive compensation issues, particularly “say on pay,” again dominated the headlines. Though by some metrics say on pay was nearly a nonissue — after all, the median level of shareholder approval was around 90 percent, with fewer than 3 percent of U.S. companies experiencing a failed vote [1] — the vote results themselves are merely the tip of the iceberg. Say on pay was a topic of paramount concern to issuers this year and was the basis for a great deal of work both before and during the proxy season. Looking back on the past few months, two primary themes emerge: First, the importance of understanding and responding to the methodology of ISS Proxy Advisory Services (ISS), as its recommendations continue to be highly significant; and second, the importance of direct, frequent communication with shareholders and investment decision makers.

Directors who make compensation decisions that result in a negative ISS recommendation, shareholder disapproval, or other public criticism will wish to consider taking steps to minimize controversy surrounding company compensation practices. And, while, in some cases, shareholders have sued boards on the basis of a negative say on pay vote, directors can be confident that their compensation decisions, when made in good faith and in accordance with their fiduciary duties, are protected by the business judgment rule.

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