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Lack of Uniformity
Clouds Future of Say on Pay
Article published on
November 23, 2009
U.S. companies and investors
that are committed to some form of say on pay are divided over the best
model to adopt.
The problem is that no benchmark for say on pay is emerging. Some companies
and investors are advocating biennial or triennial votes on compensation.
Even if annual votes are mandated by Congress — a bill that would mandate
annual say-on-pay votes has passed the House of Representatives — it’s
unclear whether the SEC will specify how
companies should word the resolution. Minor differences in language can mean
votes on entirely different aspects of compensation: the philosophy of the
pay plan, the actual amount of compensation or the quality of the disclosure
in proxy statements.
This means boards have their work cut out for them if they are considering
adopting say on pay. Companies that have already adopted the policy say
communicating with shareholders to decide what policy they prefer is the
best place to start. But the absence of uniformity could also mean confusion
among investors over determining what pay plans they are voting on in a
given year and what exactly the board is asking for a vote on.
The lack of consensus in the U.S. stands in stark contrast to what’s
happening in Canada. The Canadian Coalition for
Good Governance has been getting issuers to adopt a uniform
say-on-pay resolution in an effort to create a standard for what the purpose
of the policy is.
Different Models in the
Microsoft made waves in September for becoming the first company to
adopt a triennial version of say on pay. The next month
Prudential Financial and
Pfizer became the first issuers to adopt a
biennial version. These big name companies could pave the way for more to
The idea of triennial say on pay was spawned by the
United Brotherhood of Carpenters and Joiners.
The union had all but given up its fight for a modified version of say on
pay, withdrawing proposals at 18 companies in September following the
passage of annual say on pay by the House this summer. But about a week
later, Microsoft announced it would be the first company to adopt the
The triennial version gives investors more time to evaluate a company’s pay
programs “because you see how compensation works over a period of time,”
says Microsoft vice president and Deputy General Counsel
John Seethoff. It also reduces the burden on
investors and gives proxy advisory firms “an opportunity to be more
thoughtful,” he says.
In its 8-K filing announcing the policy, Microsoft says its compensation
program is designed to reward performance over a multi-year period, making
the triennial version the most logical choice.
Over 98% of shareholders supported the company’s executive pay practices in
its first say-on-pay vote at its annual meeting Nov. 19, according to a
company press release.
Prudential Financial gives similar reasons for its decision.
Peggy Foran, Prudential’s vice president and
chief governance officer, says the company asked its shareholders their
thoughts on say on pay and received feedback that an annual vote would be
too much work at a time when “institutional investors are trying to step up
their obligations,” she says.
“We’re all experimenting right now… if it doesn’t work [the board] will go
back to the drawing board,” Foran says.
Tim Smith, senior vice president of
Walden Asset Management, which filed an
annual say-on-pay proposal at Microsoft, says its explanation for going with
the triennial version makes some sense. He is still, however, in favor of an
Canada’s Push for
The Canadian Coalition for
Good Governance (CCGG), which represents most of Canada’s large
institutional investors, has taken a more proactive role in creating a
standard for say on pay than its U.S. counterpart, the
Council of Institutional Investors (CII).
CCGG introduced a model say-on-pay
resolution last month that it has gotten nine companies to adopt so far.
CII, on the other hand, passed a resolution in 2007 saying it supports an
annual shareholder say-on-pay vote, but has done little since then to get
“Every company was starting to develop their own standard and resolution,”
says CCGG director Stephen Griggs. “We felt
since many of our members, if not all of them, voted in favor of say on pay
that we should move it forward in an organized fashion.”
The model resolution asks shareholders to vote on the approach to executive
compensation disclosed in the company’s proxy statement. It goes on to say,
“In the event that a significant number of shareholders oppose the
resolution, the board will consult with its shareholders (particularly those
who are known to have voted against it) to fully understand their concerns
and will review the company’s approach to compensation in the context of
It also recommends that the board, when faced with a “significant number” of
shareholders who oppose the compensation, disclose within six months, and no
later than the following year’s proxy statement, a summary of the comments
received from shareholders in the engagement process and any changes to the
compensation plans as a result of the process.
CCGG is also meeting with the chairman of the board and chairman of the comp
committee of 25 companies that have adopted say on pay next year to discuss
their pay plans. The coalition plans to make recommendations to its members
on how to vote based upon conversations with the board, Griggs says.
The Experience at TARP
Walden Asset Management’s
Smith says that while he’s in favor of a policy dictating an annual
say-on-pay vote, when it comes to how companies word their resolutions,
there isn’t a need for uniformity.
He notes that most TARP companies came up with similarly worded resolutions
when forced to adopt say on pay this year even without specific requirements
dictated by Congress or the SEC.
While that’s true, some TARP recipients’ say-on-pay resolutions differed in
small, but notable, ways.
TCF Financial, a bank holding company based
in Minnesota, asked stockholders at its annual meeting this year to “approve
the compensation of the company’s executives as disclosed pursuant to the
compensation disclosure rules of the Securities and Exchange Commission.”
The problem is that the SEC has yet to finalize its disclosure rules and
there is “nothing scheduled at present,” says a spokesman.
In its say-on-pay resolution, Connecticut-based
Webster Financial emphasizes the philosophy of its pay programs and
not the actual amount of pay. The resolution asks shareholders to “approve
the executive compensation philosophy, policies and procedures described in
the Compensation Discussion and Analysis.”
In comment letters for the SEC’s proposed guidance for say-on-pay
resolutions at TARP firms, several groups call on the commission to develop
“A uniform standard would create a level playing field… [and] would provide
needed guidance and uniformity,” partners from the law firm
Sullivan and Cromwell
That logic would apply to all companies if say on pay becomes law.
“It’s helpful for both issuers and shareholders to have some expectation of
what should be included in the language,” says
Eleanor Bloxham, CEO of The Value Alliance.
Of course, that wouldn’t happen until Congress directs the commission to do
But Microsoft’s Seethoff says the flexibility companies currently have in
the U.S. to adopt say on pay in any form they choose is preferential to a
rigid standard that might be emerging in places like Canada: “When you look
across the U.S. market, it’s quite different in size and diversity… in that
context it is worthwhile to experiment with [say on pay].”
If, however, after a few years a generally accepted standard for say on pay
has not emerged, Seethoff says he could foresee a stakeholder group coming
together to advocate one.