A Say on “Say-on-Pay”: Assessing Impact After Four Years

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

The 2015 proxy season is the fifth one in which shareholders of thousands of publicly traded corporations have cast non-binding votes on the executive pay programs of the companies in which they are invested. The holding of such a vote, commonly known as Say-on-Pay, is required under Section 951 of the Dodd-Frank law. [1] That requirement applies to most publicly traded companies. Following are some observations on Say-on-Pay.

Results of Votes

In each of the four years of Say-on-Pay—2011-2014 proxy seasons—at the Russell 3000 companies holding Say-on-Pay votes (i) the executive pay program received favorable votes from over 90 percent of the shareholders voting at 75 percent of those companies and (ii) 60 or fewer companies had a majority of votes cast disapproving the executive pay program. [2]

Evaluating the Impact

Following are two propositions on how well Say-on-Pay is working.

Proposition #1: Say-on-Pay causes shareholders to become better informed and more involved in the executive pay process.

Viewpoint Supporting Proposition #1:

Say-on-Pay encourages shareholders to cast votes (non-binding) on the executive pay programs at the companies in which they are invested. Giving the owner of a business enterprise a voice (even a non-binding one) on executive pay is good corporate governance. [3]

Institutional shareholders, encouraged by the U.S. Securities and Exchange Commission (SEC), are retaining proxy advisers to better inform themselves on how they should vote. [4] In that same process, issuers themselves are becoming better informed and consultants, legal counsel and others advising institutional shareholders on executive pay are likewise becoming better informed. Finally, the Say-on-Pay process encourages issuers to reach out directly to shareholders and explain the strategies and business needs underlying their executive pay decisions.

Viewpoint Opposing Proposition #1:

Many institutional shareholders, as noted, “outsource” their Say-on-Pay vote to proxy advisers. These advisers, for a fee, recommend to the shareholders retaining them how the shareholders should vote and provide the shareholders a report explaining the basis for the recommendation. A vote based on the proxy adviser’s recommendation does not mean the shareholder understands the reasons underlying the executive pay decisions at the particular issuer.

Most shareholders of most public companies have limited interest in the design or content of executive pay at the company in question provided it is generally in line with pay at comparable companies. They are much more interested in the current price of the stock. A Say-on-Pay vote at a particular issuer will be favorable unless the stock price is falling or there is clear misalignment of top management’s pay (i) with pay at other companies and/or with (ii) the company’s performance (including its stock price). Say-on-Pay is as much a referendum on stock price as it is on pay practices.

A recent paper published by MFS Investment Management (May 2014), “Lengthening the Investment Time Horizon,” estimates that the average period that a share of stock is held by investment managers of certain large equity mutual funds is approximately 17 months. This means that many of the shares being voted in a Say-on-Pay vote will not be owned by the same shareholders at the next Say-on-Pay vote. To the extent a Say-on-Pay vote involves transient voters it can hardly be described as a vote by investors with a long-term interest in the enterprise who have informed themselves regarding the alignment of executive pay with the long-term value of the enterprise.

Comment on the Two Viewpoints on Proposition #1:

There is little evidence that most shareholders in major public companies have a robust understanding of executive compensation at the companies of which they are shareholders. This includes the policies and decisions underlying executive pay and the relationship of those policies and decisions to corporate performance (not just stock price). In fact, a recent survey indicates that many institutional investors find that proxy statement discussions of executive compensation are confusing and difficult to understand. [5]

If there is an egregious disconnect in executive pay, whether relative to stock price or otherwise, there will be votes of disapproval. In those cases, expressions of shareholder concern can contribute to a solution. But a vote that simply represents a “for” or “against” based on a proxy adviser’s recommendation is not itself a reflection of shareholder understanding of the underlying pay issues.

Proposition #2: Say-on-Pay results in better decision-making by boards of directors in determining the design of executive pay.

Viewpoint Supporting Proposition #2:

Proxy statements, proxy adviser reports and other information exchanged in connection with the Say-on-Pay vote brings better information to the boards of directors (and, in particular, the compensation committees that are making the decisions on executive pay). In this process, as noted in connection with Proposition #1, shareholders, especially institutional shareholders, are becoming better informed and they, in turn, encourage directors to make better executive pay decisions.

Viewpoint Opposing Proposition #2:

  • 1. The quantity of information being processed by compensation committees is overwhelming. Compensation committees have a fiduciary duty to understand the data and, based on that data, to make appropriate decisions in light of the specific circumstances at the issuer. (Their decisions are often in conflict with the thinking of proxy advisers). The schedule faced in connection with Say-on-Pay is daunting.
    • a) Most proxy statements are distributed approximately 30 days before the shareholders’ annual meeting.
    • b) Within that 30-day period, proxy advisers prepare their reports and recommendations to shareholders retaining them.
    • c) In those cases where directors are able to see a copy of the proxy advisers’ reports and recommendations, directors have even less than 30 days before the annual shareholders’ meeting to respond (or to decide not to respond). Even when proxy adviser evaluations lead to affirmative vote recommendations (the vast majority of cases), there may be elements of the evaluations—quantitative and/or qualitative—with which directors disagree, including factual errors (not surprising if there are some, given the limited amount of time and the large quantity of data involved in preparation of proxy advisers’ reports).
    • d) Within this same 30-day period, shareholders cast their vote. It is doubtful how much time shareholders have to really reflect on the proxy advisers’ reports and recommendations regarding the many companies in which these shareholders are invested.
  • 2. The schedule noted in paragraph 1 above forces proxy advisers into a “one-size-fits-all” methodology in preparing their reports and recommendations in connection with Say-on-Pay votes. One example of this “one-size-fits-all” model is the treatment by Institution Shareholder Services (ISS), the largest proxy adviser, of total shareholder return (TSR) as a dominant factor in its quantitative analysis of whether CEO pay is “aligned” at an issuer. TSR compares the stock price on two different dates (and takes into account dividends in between). One of the three basic quantitative tests used by ISS is to measure the alignment of the company’s TSR relative to TSR of a comparator group of companies between two dates, 36 months apart under the current ISS model, and compare this with the three-year average of the CEO’s pay relative to the three-year average of the pay of CEOs at the same group of companies during the same period. TSR is not a proper measure of corporate performance producing sustained value in a business enterprise. It is a measure of stock price changes, which is a reflection of many factors including factors outside the control of the management of a business. Furthermore, this “one-size-fits-all” approach ignores the fact that executive pay decisions overseen by directors involve circumstances that are often very complicated and frequently of a confidential nature.
  • 3.The “elephant in the living room” for directors is the potential inhibiting effect of this Say-on-Pay process on directors’ own decision-making. Obviously, a key intention of Say-on-Pay is to encourage directors to think carefully about the pay policies and decisions that they make. On the other hand, unfortunately, many directors may feel they have to look over their shoulders at proxy advisers, because of concerns such as: (i) their decisions may be criticized in the reports to shareholders by the proxy advisers; (ii) a proxy adviser may recommend and, as a result, a majority of shareholders may cast a negative Say-on-Pay vote (even a favorable-vote majority may not be satisfactory if it is not a substantial majority); and (iii) a proxy adviser may recommend a negative vote (or withholding a vote) with regard to re-election of directors (a special concern to compensation committee members) if the proxy adviser does not like the pay decisions made by the compensation committee. This is not encouraging or assisting directors in following a rational thought process on executive pay.

Comment on the Two Viewpoints on Proposition #2:

Directors, especially compensation committee members, are being swamped by information and analytics relating to executive pay. None of the parties to the Say-on-Pay process—directors, shareholders and their advisers (including proxy advisers)—have enough time to truly absorb and understand all the data and analytics. The “one-size-fits-all” models may seem to be a solution, but they are not. Perhaps a solution would be to give more time to all the parties in this process. This point is discussed in the following section.


Say-on-Pay votes should not be held every year. Every two or three years is frequent enough for shareholders to review and express their views on executive pay at an issuer. In order to change from an every-year frequency to one that is once every two (or three) years, an issuer should seek a favorable shareholder vote on the frequency of Say-on-Pay. An exception to the recommended frequency should be made if the executive pay at an issuer receives a favorable vote below a certain level—such as 70 percent of votes cast. In that event, a Say-on-Pay vote would be required every year until a majority vote of more than 70 percent, or other minimum that might be set, is obtained. [6]

The reasons for this recommendation include the following:

  • Given the current schedule for Say-on-Pay there is not enough time each year for the parties involved to collect and understand the information needed for a meaningful Say-on-Pay vote. All parties are forced to scramble, and the consequences are very problematic.
  • In many cases (especially the cases in which proxy advisers are recommending an “against” vote) issuers need to sit down with institutional shareholders and, if necessary, with the proxy advisers and explain why the issuer’s particular situation warrants the pay practices involved. A Say-on-Pay vote every two or three years would permit this. A Say-on-Pay vote every year does not. [7]
  • Say-on-Pay is contributing to “shaking the bad apples from the trees.” But it is not contributing to the development of sound executive pay standards. Instead, it is creating a “one-size-fits-all” mentality. The establishment of meaningful incentive pay standards must take into account financial performance criteria such as economic profit and return on capital versus cost of capital. [8] Other criteria include human resource issues, research and development, government regulation, meeting challenges of competitors and many others. Identifying the appropriate criteria, understanding how they should be applied and making the correct decisions based on those criteria would lead to more rational executive pay practices and standards.


[1] Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Pub. L. No. 111-203, §951, 124 Stat. 1376, 1899 (2010). Dodd-Frank Section 951 amended the Securities Exchange Act of 1934 by adding Section 14A (codified as amended at 15 U.S.C. §78n-1). For prior discussions on Say-on-Pay, see NYLJ columns Aug. 25, 2011, Dec. 1, 2011, March 23, 2012 and July 3, 2012.
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[2] In each of the years 2011-2014 the Russell 3000 companies receiving negative Say-on-Pay votes numbered 37, 57, 57 and 60, respectively. This represented, for each year, 1.4 percent, 2.6 percent, 2.5 percent and 2.4 percent, respectively, of the total number of Russell 3000 companies holding votes. (The largest proxy adviser, Institutional Shareholder Services (ISS), recommended a negative vote as to the executive pay programs at approximately 300 of these companies (representing between 12 percent and 14 percent of the total number of Russell 3000 companies holding votes each year).) See, for example, the report entitled, “2014 Say On Pay Results—Russell 3000,” published by Semler Brossy Consulting Group, LLC (January 2015).
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[3] The regulations under Dodd-Frank Section 951 suggest an example of a Say-on-Pay resolution as follows:

RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED. (17 CFR 240.14a-21(a))

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[4] See Proxy Voting by Investment Advisers, SEC Release No. IA-2106 (Jan. 31, 2003). See also Proxy Voting: Proxy Voting Responsibilities of Investment Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory Firms, Staff Legal Bulletin No. 20 (June 30, 2014).
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[5] RR Donnelly Financial Services, Equilar, Inc. and The Rock Center for Corporate Governance at Stanford University, “2015 Investor Survey: Deconstructing Proxy Statements—What Matters to Investors” (2015).
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[6] Approximately 85 percent of the Russell 3000 companies hold Say-on-Pay votes every year. There are several ways this practice might be changed.

  • (i) Congress could amend Dodd-Frank Section 951 (more specifically, Section 14A(a)(2) of the Securities Exchange Act of 1934) to provide that Say-on-Pay be held no more frequently than once every two or three years, except in cases of favorable votes falling below a prescribed level, such as noted in the text.
  • (ii) An issuer currently holding a Say-on-Pay vote every year could hold a vote to change the frequency to once every two (or three) years (with exceptions as noted in clause (i)).
  • (iii) An issuer currently holding a Say-on-Pay vote every year might simply change the frequency of such vote to once every two (or three) years (with exceptions as noted in clause (i)). The problem with this last approach is that ISS has stated in its guidelines that in such event it might recommend a negative vote on some or all current directors of the issuer. See “United States—Summary Proxy Voting Guidelines—2015 Benchmarking Policy Recommendations,” published by ISS (Dec. 22, 2014), at p. 14.

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[7] A concern might be raised that even if Say-on-Pay were held only once every two or three years, the 30-day schedule between proxy statement distribution and the Say-on-Pay vote would remain. The answer is that it is not those 30 days that are of most concern. It is the time between votes that is the problem. This is a period when proxy advisers’ reports and the results of the Say-on-Pay vote need to be studied by issuers. Issuers then need to discuss with major shareholders and, if necessary, with proxy advisers any questions that have been raised. These discussions then must be considered by the issuers and incorporated into the pay decision process. (Issuers are considering many matters, not just Say-on-Pay issues, in reaching their pay decisions.) Approximately 10 months after the last Say-on-Pay vote, issuers are preparing the proxy statement for the next annual meeting (and Say-on-Pay vote). This is insufficient time for a meaningful Say-on-Pay process to take place.
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[8] A recent research report on this subject was published by the Investor Responsibility Research Center Institute (Nov. 17, 2014) entitled, “The Alignment Gap Between Creating Value, Performance Measurement and Long-Term Incentive Design.”
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