Say on Pay Leading to
Better Communication About Compensation
Executive compensation has long been an area of intense
interest for shareholders, corporate boards, CEOs, senior executives – and
to the SEC.
But, at the SEC, our interest is different from that of
other stakeholders. It’s not rooted in any opinion regarding the level of
compensation a corporate executive might receive. That is for companies
and shareholders to discuss.
Rather, our interest is in ensuring that in this matter –
as in other areas of corporate governance – the shareholders who own a
company receive the information they need to make an informed judgment,
and that they have a vehicle through which they can express that judgment
to the board.
I believe that effective communication between shareholders
and boards is a cornerstone of good governance.
But, in the years leading up to Dodd-Frank, there was a
feeling that the conversation between shareholders and boards regarding
executive compensation was unsatisfactory. We heard complaints that the
compensation disclosures provided investors were too dense to penetrate,
too complex to analyze and too obtuse to persuade. In fact, we were under
noticeable pressure to force clearer disclosure through the rulemaking
I am pleased to report today, then, that it appears that
the say-on-pay regulation put in place through Dodd-Frank is leading to
improvements in communication in both directions. It has given
shareholders a clear channel to communicate satisfaction – or lack of
satisfaction – with executive compensation practices to their boards. And
it is giving boards a powerful incentive to clarify disclosure to
shareholders, and to make a clear, coherent case for the compensation
plans they have approved – and to do this without the SEC adding another
layer of disclosure regulation.
While the SEC expects to propose additional compensation
disclosure rules in the near future, that are required by Dodd-Frank, I
believe that the baseline say-on-pay regulations are already having a
beneficial effect on compensation disclosure practices at public
companies, and provide a benchmark against which to measure progress as
other rulemakings proceed.
The say-on-pay voting requirements in Dodd-Frank were
designed to be effective for the 2011 proxy season. But Congress did not
set a deadline for Commission action. We believed, however, that it was
important to provide compliance guidance to companies before proxy season,
and to act aggressively to limit confusion during say-on-pay’s critical
first year. And so we adopted final rules on January 25th.
As this group knows well, the rules require companies to
provide shareholders with an advisory vote on executive compensation at
least once every three years. The rules also require an advisory vote on
the frequency of say-on-pay votes at least once every six years.
In addition, companies must provide a separate advisory
vote regarding certain “golden parachute” arrangements in connection with
a merger, acquisition, or other disposition of all or substantially all,
The outcomes of these votes are not binding on the company
or its board of directors, and they do not affect the validity of
executive officer compensation arrangements. The advisory vote does,
however, let boards know what shareholders think of compensation
Companies are required to quickly report on Form 8-K the
results of these votes, and I know that there is tremendous interest in
the outcome of these votes.
In addition, companies have to report the decision on the
frequency of say-on-pay votes.
And, going forward, companies will have to disclose in
proxy statements, in the year following the vote, how they have responded
to the most recent say-on-pay vote. This will provide another set of data
points for investors, as they observe how their vote was regarded and
acted upon by the board and the company’s executives.
Some companies appear to have found the say-on-pay vote
requirement challenging. Few compensation packages were actually rejected.
According to TheCorporateCounsel.net and CompensationStandards.com,
approximately 40 companies received negative votes. But even in many cases
in which shareholders approved the board’s compensation strategy, a
significant percentage of shareholders voted “no.”
Corporate governance consultant ISS has reported that, as
of the beginning of August, more than 30 companies had received only 50 to
60 percent support for their pay practices. And litigation has followed
several negative say-on-pay votes.
It is my hope that a “no” vote or even a significant vote
against a company’s executive compensation practices will force boards to
ask themselves some very tough questions.
executive compensation policies be altered in response to the vote?
the board’s executive compensation philosophy been clearly articulated to
should the board engage with shareholders in response to the vote?
should the board consult with in connection with responding to the vote?
what should the Board consider changing about its compensation plans?
And I am heartened to see that companies filing proxy
statements following say-on-pay votes are in fact responding to these
issues. Compensation does not necessarily have to change in response to a
significant negative vote, but a re-examination of executive compensation
is a healthy exercise.
Another trend to emerge from this proxy season is that of
shareholders choosing to hold advisory votes every year. This shows that
shareholders want boards to maintain a focus on executive compensation.
They recognize the importance of compensation as an incentive for positive
performance. But they also recognize that compensation policies can
incentivize risk-taking that subject companies to significant exposure –
much of which may not have been adequately considered by boards.
Shareholders want boards to be on top of this, and an
annual vote can be a powerful tool in this regard.
They also want companies and compensation committees to
better convey their thinking regarding calibration and structure of senior
executives’ compensation packages. I think this is a good thing. And I
know from talking with my staff that they think this is a terrific
development as well.
We share a hope that this trend towards more effective
communication regarding executive compensation will continue and
We would be very pleased if market forces – the desire to
persuade shareholders that they should vote “yes” in the say-on-pay vote –
caused companies to continue to improve their executive compensation
disclosures, eliminating the pressure for further SEC rulemakings in this
And, as are many shareholders, we are also looking forward
to disclosure of compensation committees’ response to the prior year’s
say-on-pay vote, and learning how those votes affect compensation policy.
While say-on-pay is the most visible SEC compensation
initiative, there are a number of additional, related rulemakings in the
We understand that many companies have concerns about the
role of advisory firms in the proxy process, including the influence of
their voting recommendations and potential conflicts of interest.
We understand, as well, that these concerns have become
more acute with say-on-pay voting. A number of companies have called on
the SEC to improve the regulation of these firms.
We, too, consider the role of proxy advisory firms an
important issue and – as you know – one that we made a significant
component of last year’s “proxy plumbing” concept release.
Currently, the Staff is working on recommendations
pertaining to proxy advisory firms and, while I can’t guarantee our timing
in light of all that we have on our plate, I hope we can address concerns
over their role, including disclosure of conflicts of interest and the
information upon which they base recommendations, by the end of the year
or early in 2012.
We proposed a Dodd-Frank compensation-related rule —
listing standards governing compensation committees and their consultants
and other advisors – earlier this year. After we adopt our final rules –
in the next few months, I expect – the exchanges will implement them by
proposing and adopting new listing standards consistent with our rules. We
got very helpful comments on our proposal, which as you know, adhered
closely to the statutory mandate.
There are also four remaining Dodd-Frank Act rulemakings
relating to governance and compensation matters: pay ratio,
pay-for-performance, claw-backs, and employee hedging of company stock. We
recognize that the requirements contained in some of these rulemakings may
be costly and complicated for you to implement, and we are interested in
ways of implementing these requirements in a practical manner. As we move
forward, however, please keep in mind that the statutory framework for
these rulemakings is, in some cases, quite prescriptive. As with all other
aspects of Dodd-Frank implementation, we have made outreach to
stakeholders a linchpin of our rulemaking efforts. I encourage you to
reach out to us as we work to complete our Dodd-Frank requirements and to
address other issues of concern.
While Dodd-Frank does not assign a deadline for these four
rulemakings, we hope to propose them by the end of the year or early in
2012, and again, we will need your input and advice on our proposals.
There is no single way to run a successful enterprise.
Different companies have differing personalities and strategies, and they
follow a variety of business and governance models. The SEC understands
this, and avoids regulation that would put us in the position of passing
judgment on any of these approaches.
However, given our role as what legendary SEC Chairman
William O. Douglas called “the investors’ advocate,” we do believe that
robust and effective communication between boards and shareholders is both
a fundamental principal of corporate governance and an important
contributor to business success.
Our goals in say-on-pay and other compensation initiatives
are to ensure:
receive the timely and accurate compensation information they deserve as a
This information is presented in a way that allows shareholders to make
Shareholders have a channel through which to communicate
their views to the board and to senior corporate officers.
I am hopeful and encouraged, that say-on-pay appears to be
speeding progress toward these goals. We look forward to your help in
crafting our other compensation rulemakings in such a way that they, too
will bring the benefits of increased communication to investors and to the
companies they own.
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