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Program Reference - The Advisors' Blog, November 13, 2008 posting


The Advisors' Blog

November 13, 2008

The State of "Say on Pay"

- Broc Romanek,

With the recent record vote of 67% support on a say-on-pay proposal at Sun Microsystems - and the high likelihood of Congress adopting mandatory say-on-pay for the 2010 proxy season - yesterday's RiskMetrics' "Say on Pay" webcast was interesting. So far this year, “say on pay” proposals have received majority support at 11 companies (up from 8 last year) - and 12 companies have agreed to conduct advisory votes voluntarily.

1. Schering-Plough's New Survey - Not much new was imparted during the webcast - which was comforting in itself to hear. To me, the most interesting part of the webcast was the discussion over Schering-Plough's unique plan to survey investors on pay practices. One panelist didn't think a survey goes far enough (ie. not transparent enough) because the shareholder feedback only goes to the board and not other shareholders. One liked it, so long as the design of the survey was sound - and it was paired with a say-on-pay vote.

Personally, I like the idea of it - but I'm afraid the reality is that most investors don't have the time to fill out surveys for all their portfolio companies - nor have the expertise to provide advice on compensation practices. Similar issues that arise for say-on-pay itself. It will be interesting to see how many do indeed respond to Schering-Plough.

2. Will Boards Know What an Advisory Vote Means - It sounded like the Center for Executive Compensation's principal argument against say-on-pay is that a board wouldn't know what a majority vote "against" would mean - and that a majority vote "for" would mean that the company wouldn't have to worry about the structure of their pay packages (as many of you know, the "Center" is run by a group of HR professionals).

I'd look elsewhere for more cogent arguments as the other panelists were quick to make these appropriate points. If a company gets a majority vote on any proposal, it's the job of the board to reach out to the company's biggest shareholders and find out the true meaning of the vote. And if the board doesn't reach out, not only will it find itself in deeper waters - but shareholders likely will speak up and tell you (directly, through the media or just voting no on the board in the following year per ISS guidelines).

On the flip side, if say-on-pay is mandatory, I'd bet that companies will work hard to refine their compensation arrangements to fall within the parameters of the major proxy advisory groups and shareholders before they put them up for a vote. So there would be dialogue about pay packages that received majority support - it would just take place before the annual meeting of shareholders. This is what happens in the United Kingdom today.

My own take on this argument is that it's true that a majority vote "against" a company's pay arrangements might mean something else other than dissatisfaction over pay. Today, some shareholders use the tactic of submitting proposals they don't care about in an effort of getting a board to the table on another issue. But by engaging with the company's major shareholders, the board will find out what shareholders want. In a nutshell, that's what say-on-pay is all about - getting boards to do their jobs and represent shareholders.

Anyways, my own views on say-on-pay remain the same. I'm on the fence and can see the pros and cons (although my list of those are different from some others). But views on the topic don't seem to matter much these days - it sure looks like Congress intends to adopt say-on-pay in the very near future...



Posted by broc at November 13, 2008 06:20 AM





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