The (Advisory) Ties That Bind Executive Pay

While shareholders of public companies in the UK and US have been voting on advisory (non-binding) resolutions about executive compensation, those in the Netherlands, Norway and Sweden have been voting on binding resolutions.

This might change. The UK government has proposed moving from advisory to compulsory resolutions on executive pay and, recently, the Swiss approved a referendum directing its parliament to require public companies to hold binding shareholder resolutions over pay.

Based on the available data, however, we do not support a general requirement for all public companies to hold a binding shareholder vote on executive compensation. But if less than a majority of the shares voted at one annual meeting favour a company’s executive compensation plan, then at the next annual meeting, the shareholder vote on that company’s executive compensation plan should be binding.

Let us begin by reviewing the data on advisory resolutions in the US and UK. In the first half of 2012, only 53 US public companies received less than a majority vote on their executive compensation plan. Of these 53, however, 45 gained majority support for their say on pay resolutions in 2013, according to Institutional Shareholder Services.

This rebound seems to mean that these 45 companies responded adequately to shareholder concerns in 2012.

In the UK, 75 public companies received dissenting votes of 20 per cent or more on their say on pay resolutions in 2003.

According to a recent analysis by Professors Fabrizio Ferri and David Maber (discussed on the Forum here), institutional shareholders were most concerned that these “high dissent” companies had severance contracts promising to pay their terminating executives more than one year’s compensation. Yet before the next advisory vote in 2004, 80 per cent of companies with these objectionable severance contracts revised them to provide executives with only one year’s compensation.

Moreover, in both the US and the UK, public companies have revised compensation arrangements before advisory votes in response to shareholder criticisms.

Negotiations between companies and their shareholders before advisory votes seem to have happened frequently, but it is impossible to get an accurate count.

Despite the usual responsiveness of companies before and after advisory votes, there are recidivists. For example, the say-on-pay resolution of Oracle did not receive majority approval in 2012 – probably because the software company reported total compensation for Larry Ellison, the chief executive, of more than $78m (mostly from the “fair value” of the options he received). Nevertheless, before the next advisory vote, Oracle did not make the compensation changes sought by its shareholders, including heavyweights such as the Vanguard and BlackRock funds.

Such repeated stonewalling of shareholders could not happen with binding resolutions on executive compensation, although these are hardly a panacea. In 2004, the Netherlands adopted a requirement for a binding vote on executive compensation, but Dutch shareholders did not veto any company’s executive compensation plan until 2008.

Since 2008, Dutch shareholders have rarely cast a binding vote against a company’s executive compensation plan. However, many more Dutch companies have withdrawn compensation proposals when a negative shareholder vote appeared likely, according to the deputy director of VEB, the Dutch shareholder association.

In Sweden, after the adoption of a binding shareholder vote on executive compensation in 2006, shareholders in general did not become more actively engaged with their public companies, according to a 2011 OECD study. Votes against Swedish companies for their executive compensation are rare, with one notable exception.

In 2010, the Swedish government voted its 37 per cent block against TeliaSonera’s variable pay guidelines.

Led by the Swedish government, 52 per cent of its shareholders voted against these guidelines, so the Nordic telecommunications group had to renegotiate all its executive employment contracts.

In short, with binding or non-binding votes, shareholders rarely disapprove of an executive compensation plan. Rather, they exert considerable influence to curb what they perceive as glaring compensation abuses through informal negotiations before either type of vote.

Since most companies are quite responsive to shareholder concerns expressed through advisory votes, we do not support binding resolutions as a general rule.

However, we recommend a binding vote the year after a say-on-pay resolution does not garner a majority of the votes cast. This two-step process would strongly encourage the small current group of recidivist companies to be more responsive to the concerns of their shareholders.