Neil McCarthy is Co-Founder and Chief Product Officer, G. Michael Weiksner is Co-Founder and Chief Technology Officer, and James Palmiter is CEO and Co-Founder at DragonGC. This post is based on a DragonGC memorandum by Mr. McCarthy, Mr. Weiksner, Mr. Palmiter, Jennifer Carberry, and Nicholas Sasso.
Background
SEC rules require that all public companies hold a separate shareholder advisory vote to approve the compensation of executives, known as “say-on-pay”. This includes compensation disclosed under S-K Item 402 such as CD&A, the compensation tables, and other narrative executive compensation disclosures. In most years for the majority of companies this vote passes with greater than 80% support from those shareholders who vote on the matter. However, for some companies the approval rate is less than 80%. Sometimes the resolution receives less than a majority and fails to pass at all. A vote receiving less than 70% of the shares in favor is generally regarded as a failure.
These adverse outcomes are often triggered by negative voting recommendations from ISS or Glass Lewis, or by actions that conflict with the executive compensation policies of major institutional investors. While SEC rules only require a non-binding advisory vote, in practice these entities provide an enforcement mechanism. Companies that have received an adverse say-on-pay vote typically respond with a shareholder engagement program during the following season.
