Article of the Week
‘Say on pay’ Is
Not a ‘Slippery Slope’
An advisory vote
on executive compensation makes sense for both companies and shareholders.
Here are 10 reasons why.
By John C. Wilcox
John C. Wilcox
is Chairman of Sodali Ltd.
a firm providing consulting and transactional services to listed
companies in Europe, Asia, and developing markets. He is also an
independent consultant on corporate governance to TIAA-CREF, where he
served as senior vice president and head of corporate governance from
2005 to 2008. Prior to joining TIAA-CREF he was chairman of Georgeson &
Company Inc. During his career he has specialized in corporate
governance, investor relations, proxy voting, corporate control
transactions, capital markets regulation, and director education.
Should shareholders have the right
to an advisory vote on executive compensation? What would be the
The predominant tone of the public discourse over advisory
votes has been highly confrontational, treating the issue as a struggle for
power between companies and shareholders. The unfortunate consequence of
this overheated debate has been to obscure the advisory vote’s most
important benefits — its potential to reduce conflict and promote
constructive dialogue between companies and shareholders.
An annual advisory vote would likely result in the
elimination of most compensation proposals under Rule 14a-8 together with
the costs and uncertainties associated with the shareholder proposal
process. In addition, over time an annual vote would shift the focus of the
compensation debate to individual company practices rather than broad policy
Fortunately, the dialogue at private meetings of companies
and institutional investors has been more substantive and nuanced than the
public debate. Here is a look behind the scenes at how some shareholders are
responding to companies’ questions about the advisory vote and the goals of
executive compensation disclosure:
1. Is an advisory vote necessary?
The goal of an advisory vote is to help ensure that
directors pay attention to the elements of compensation that matter most to
investors: goals, metrics, philosophy, and links to performance and business
Shareholders generally agree that they don’t have the
knowledge or inclination to second-guess how or how much senior executives
should be paid at specific companies. They want board compensation
committees to handle this responsibility, provided they act responsibly and
explain their decisions. Shareholders also agree with companies that
compensation standards should be flexible, strategic, clear, and not
standardized or formulaic.
If a company’s Compensation Discussion and Analysis (CD&A)
makes a convincing case that its compensation program is performance-based
and rewards executives for solving business problems and creating long-term
value, shareholders will support it even if the amounts paid seem high.
Since performance-based compensation implies that exceptional performance
deserves exceptional pay, companies should not fear that votes will be
2. If shareholders are given an advisory vote on
compensation, won’t they end up micromanaging the company’s business?
The advisory vote on compensation is not a “slippery
slope.” Executive compensation is a one-of-a-kind issue for which an
advisory vote is uniquely suited.
Compensation is an annual concern; it involves difficult
and sensitive issues; it requires boards to exercise independence, skill,
and judgment; it is integral to a company’s long-term strategy and
performance. The importance of compensation is further underscored by the
SEC’s extensive disclosure requirements, which are substantially more
detailed than for other issues in the proxy statement.
For all these reasons, compensation opens a window into
the boardroom, revealing how directors set priorities and balance competing
interests. The advisory vote in turn offers a means for shareholders to
provide feedback on how the board is handling these duties. An annual
advisory vote has the potential to increase dialogue and provide companies
with early warning of shareholder concerns before a crisis develops.
3. Isn’t an advisory vote misleading, since the vote
results may not send a clear message?
If compensation programs are appropriately customized, the
meaning of an advisory vote will be different at every company. Uncertainty
can be dealt with in two ways: (1) companies can survey shareholders
directly or provide a Web site for their comments; and (2) shareholders can
be held to best practice standards that call for diligence in proxy voting,
reporting and communication.
Responsibility for communicating with shareholders falls
squarely on the management and boards of public companies. At the same time,
shareholders — particularly institutional investors governed by fiduciary
standards — should accept full responsibility for their voting decisions and
should take advantage of every means available to explain them.
4. Won’t advisory votes weaken boards?
An advisory vote should empower boards, not weaken them.
Accountability to shareholders should reinforce directors’
independence and strengthen their resolve to deal with compensation
strategically. It should reduce directors’ reliance on compensation
consultants and benchmarks, encourage them to customize their programs, and
broaden their use of compensation to drive business strategy in addition to
attracting and retaining executive talent.
5. Won’t an advisory vote ultimately draw shareholders
too deeply into compensation decision making?
In the U.K. the advisory vote is credited with increasing
dialogue between companies and investors, particularly in the early stages
of designing compensation plans. U.S. shareholders are less interested in
such early-stage engagement, which many would characterize as
Instead, they seem willing to defer to the expertise of
managers and board compensation committees, while holding them accountable
for disclosing, explaining, and justifying their decisions. Judgment
after-the-fact is standard practice for U.S. shareholders, who tend to take
a long-term view and recognize that improvement in compensation practices
will take time.
6. How will proxy advisors handle recommendations on
Proxy advisors’ compensation analyses and recommendations
have in some cases utilized “black-box” formulas and quantitative factors
applied uniformly to companies with little regard for context. Such an
approach is not suitable for evaluating customized compensation programs and
disclosure. Proxy advisors say they recognize the need to revise their
evaluation methodology and are beginning to do so in response to demands
from both investors and companies.
In any case, companies must recognize that they bear
primary responsibility for communicating with shareholders when they believe
proxy advisors’ recommendations are wrong. Such communication campaigns are
already commonplace when companies are seeking shareholder votes to approve
equity compensation plans.
7. Isn’t a vote against directors more effective than
an advisory vote?
Withhold and vote-no campaigns against directors are a
blunt instrument that sends a powerful message. Recognizing that a
director’s independence, experience, skill, and conduct inside the boardroom
are difficult to assess from outside the boardroom, many shareholders are
reluctant to evaluate directors on the basis of a single issue.
Accordingly, their policies recommend that withhold and
against votes should generally be reserved for serious cases involving
violations of fiduciary duty, undisclosed conflicts of interest, unethical
conduct, or failure to protect the interests of shareholders. Under such
guidelines a vote against directors based exclusively on a company’s
compensation shortcomings would be viewed as an overreaction. Particularly
since the adoption of majority voting in director elections, best practice
standards call for shareholders to exercise restraint in their votes against
The advisory vote avoids a heavy-handed approach and
provides a moderate response that focuses on compensation concerns.
8. Is legislation or regulation the best way to mandate
an advisory vote?
Since shareholders do not favor a one-size-fits-all
approach to compensation, they are concerned that regulation could be overly
prescriptive or formulaic.
As with the adoption of the majority vote standard,
private ordering is a preferred alternative to regulation. Companies should
consider voluntarily amending their charter or bylaws to provide for
However, the window of choice for voluntary action may not
be open for long — bills are pending in Congress to mandate the advisory
vote, and the NYSE, whose listing requirements already mandate a binding
shareholder vote on equity compensation, could extend the requirement to
other forms of executive pay.
9. Won’t an advisory vote increase companies’
vulnerability to activism and other short-term market forces?
An advisory vote ultimately poses the question of trust
between companies and their shareholders. Companies are understandably
concerned about the diversity of shareholder interests. They are reluctant
to give more leverage to aggressive, high-profile investors with short-term
financial goals and questionable commitment to the business enterprise. At
the same time, responsible, long-term investors rightfully demand a voice in
decisions affecting the future of their investment.
By definition, an advisory vote is both non-binding and
self-limiting. It offers a referendum on compensation, not a forum for
activism or change of control.
Advisory votes are not designed to encourage opportunistic
short-term strategies, but to support basic corporate governance standards
that strengthen economic performance, reward appropriate risk-taking,
increase director accountability, and protect the long-term interests of
10. Aren’t shareholders expecting too much from
compensation disclosure and the advisory vote?
Should the CD&A be retrospective or prospective,
short-term or long-term, defensive or proactive? These questions are being
asked by both companies and shareholders as they deal with the complex legal
and technical requirements imposed by the SEC disclosure rules.
While the attention of the SEC staff is focused primarily
on issues of materiality in pay decisions for the reporting year,
shareholders are equally concerned about the ways in which compensation
aligns with business strategy and drives long-term performance. Companies
face the admittedly difficult task of both complying with detailed rules and
explaining how their decisions serve the long-term interests of owners.
The hope is that the SEC and companies will find the right
balance of disclosure and narrative that best enables shareholders to
evaluate each company’s executive compensation program on the merits.
The author can be contacted at
This article originally appeared in the
Annual Report 2008 special edition of Directors & Boards.
Copyright © 2008 Directors &
Boards, P.O. Box 41966, Philadelphia, PA 19101-1966. All rights reserved.