January 18, 2011
Towers Watson recently polled 135 U.S. publicly traded companies on the
topic of adivsory say-on-pay votes and found that 51% of respondents
expect to hold annual say-on-pay votes, while 39% prefer the vote be held
every three years, and 10% anticipate holding biennial votes. The
respondents, mainly HR executives, cited a range of reasons for their
choices, including accountability to shareholders and minimizing
admistration burdens. Jim Kroll, Senior Consultant, Towers Watson, spoke
with Corporate Board Member about the findings of the poll.
Corporate Board Member: Were you surprised by the findings?
Jim Kroll: Sure. One thing that’s interesting is the question of,
what are companies doing to prepare for the 2011 proxy season,
specifically because of say on pay? There it was a pretty even mix between
companies that are following the same process as in the past, and then the
other half, almost evenly split, that are making modest or minor
adjustments. We hear so much about say on pay maybe we would have expected
to hear more change happening, but I’m not surprised there because I think
we’ve seen the change sort of building up for some time. That’s why I’m
not terribly surprised that we didn’t see a ground swell of companies
saying, “Oh, we’re making changes.” The change has already been happening.
What’s interesting is that of the companies making changes, [the
changes themselves] aren’t out of the ordinary. Many of these companies
are devoting more attention to preparing their Compensation Discussion &
Analysis. Companies are also anticipating some degree of change to certain
programs may be needed so when [they are] making adjustments, it is to the
types of programs that might be viewed as problematic by shareholders and
The actions companies are taking involves greater interaction with
shareholders and proxy advisors. Companies are planning to meet or have
conversations with large shareholders or to consult with proxy advisors to
make sure they understand their policies. But there’s also an engagement
component to the preparations.
CBM: Why do some companies favor an annual say-on-pay vote
versus some expressing preference for the bi-annual or tri-annual votes,
and what are the pros and cons of each of these votes?
JK: There are pros and cons to each. This survey uncovered a
fairly consistent series of responses, which actually go to either the
annual or the tri-annual, or you could reason the bi-annual vote. The
leading responses were accountability to shareholders and to minimize the
administrative burden. And where I can see a company gravitating towards
an annual vote you might reason that they’re doing this to enhance
accountability to shareholders. So you might reason that the desire to
minimize that administrative burden would lead a company to favor either a
tri-annual or a bi-annual vote.
We asked companies what their current thinking was on how frequently
they would conduct votes, and a slight majority selected annual, which [is
a surprise because] if you’ve been following the recent proxy filings,
some of the early filings we’ve seen have shown a favor toward a
tri-annual vote. But we saw in late November, proxy advisors such as ISS
come out in favor of annual vote. I anticipate that now we’re hearing
anecdotally that some shareholders are now coming out and saying we prefer
annual votes. So that also could be guiding some companies’ thoughts.
Some might favor an annual vote just because in their own process it
may take on a more routine feel to it, meaning that when you do it every
year it becomes just a consistent part of the proxy process that you weave
in and it doesn’t stand out as much because it becomes ingrained in the
And then on the flip side for those companies that are considering the
tri-annual or bi-annual, it gives them time, depending on the outcome of
the vote and any preferences expressed by shareholders about certain pay
programs, to consider and make changes and sometimes those changes may not
be easy to make within a one-year timeframe. So that may be another
consideration for why companies would favor a longer time period between
the two votes.
CBM: If companies communicate clearly and often with their
shareholders, the say-on-pay vote should not yield any surprise no matter
how often it’s conducted, right?
JK: I think the surprise word is really accurate because if there
is an engagement process or an outreach program of some sort neither party
should be caught off guard with what they see, meaning that shareholders
should have a proxy that tells them a story that they’re not surprised by
and companies shouldn’t be surprised by shareholder feedback if they’re
speaking with them. I suppose you could say there are always going to be
the off circumstances, but if we look back over the past two years, for
example, in the first TARP votes the results were fairly positive across
the board for the say-on-pay votes that took place. To me that would
support the concept that this shouldn’t be a surprising outcome in
general. Granted there will always be a few cases, but I don’t know that
there’s wholesale surprise that’s pending out there. Companies have been
contemplating or adapting all along.
CBM: Do you find that companies are changing the way they’re
structuring executive comp programs as a result of the Dodd-Frank reforms?
JK: I think there is a continued evolution or adaptation. Many
parties, whether it’s a shareholder or a proxy advisor, have made their
views known about the things they don’t like. We see some companies that
have made many changes in the past few years and we’ve talked to others
that are in the process of considering change now.
CBM: How do the companies measure a successful voting outcome?
JK: We asked participants, how do you define a successful
say-on-pay outcome? The responses were pretty evenly split between those
who weren’t sure and those who had some sense. It was interesting to me
that this probably is a topic that’s still in the minds of many people and
the opinions are still forming. The same is true of another question we
asked about once you have the results and you have to analyze or act on
them, do you have a process in place for doing so? And very, very few
people said they did. I wouldn’t label these responses as surprising, but
it was an interesting outcome to know that many companies have probably
spent a great deal of time preparing by looking at their pay programs and
are probably right now busy crafting CD&As so sort of the next stage is
kind of the how do you define success and what do you do if you’re not
pleased with the outcome.
CBM: That’s something companies will have to give serious
thought to as we enter proxy season.