Boards Get Ahead of
Article published on
November 9, 2009
A majority of corporate
directors are taking action in anticipation of a say-on-pay policy at their
companies. A “wait and see” approach isn’t proactive enough, many directors
say, according to a recent Agenda survey.
Twenty-nine percent of corporate directors are planning for say on pay by
keeping themselves informed of the latest developments, while an almost
equal number, 28.5%, say they are focused on making sure there are no
perceived poor pay practices if and when Congress mandates say on pay.
Only 2.3% responded that they are doing nothing to prepare, underscoring the
concern and sense of imminence about the measure.
The statistics are based on the results of Agenda’s
and Officers Outlook: Q4” survey, which was conducted between Oct. 21
and Nov. 4.
Meanwhile, 13.8% said they are preparing for say on pay by communicating
with shareholders, 10.8% are reworking or improving disclosure and 6.2% are
focusing on retention. (For complete results please see chart.)
James Taranik, a longtime director at
Newmont Mining and engineering professor at
the University of Nevada, says his board
has been planning for say on pay by beefing up disclosure in the proxy
statement in a way that speaks directly to shareholders. “There was a
conscious decision by the full board to ask the compensation committee to go
ahead and prepare that material… and encourage the company to put that on
At Newmont’s board meeting a couple weeks ago, the full board had a complete
review of where its compensation stands in relation to the other companies
in the manufacturing and mining industry, with an eye toward say on pay and
other pending regulatory and legislatively mandated changes.
There is fear among some directors that say on pay is a slippery slope
toward pay caps, prompting some to take defensive action now.
That fear has been fueled by CEO salary caps in place for TARP recipients
and compensation restrictions issued by Special Master
Kenneth Feinberg for the seven “exceptional”
“Maybe this is the time to stop and say, ‘This is the time to plan
something,’” says Palomar Medical Technologies
Chairman Dan Valente, who is also a
director at MKS Instruments and
Medical Information Technology. If Congress
passes say on pay and boards sit back and wait for it to happen, it will be
too late to thwart unwanted consequences of legislation, he says.
Pay caps are a worry for Valente, whose boards are already brainstorming
ways to avoid any onerous legislation. Retention is a key concern, he says.
Some of his boards have considered a bylaw amendment that would ensure
executives are entitled to their salary and bonus despite any law change or
a negative shareholder vote.
“Maybe we need bylaws that say, say on pay can’t cause a cut in the senior
executive’s salary,” he says.
While only 7.7% of
respondents to the Agenda survey said they are planning to adopt their own
policy or already have, several large companies in the past couple of months
have added their names to the growing list of issuers that have voluntarily
adopted the measure.
Some companies have said they adopted it because they are confident in their
pay practices and have nothing to worry about. Others adopted say on pay
under pressure from shareholders. Most recently, a small handful of firms
adopted a modified version of the annual vote Congress is considering.
Microsoft adopted a triennial say-on-pay
policy in September, and Prudential Financial and Pfizer adopted biennial
versions last month. Susan Wetzel, chair of
the Employee Benefits and Executive Compensation practice group at
Haynes and Boone, says some companies are
adopting modified versions of say on pay in hopes that “maybe if we all just
agree to do it, it won’t happen from Congress.”
It could be a smart move.
Triennial or biennial say on pay would be a less costly option for issuers,
and some shareholders argue it would be easier for them to thoroughly cast a
vote on compensation if that vote didn’t take place every year. However,
Wetzel notes that this strategy may backfire. “I don’t know if that
philosophy will actually work because our legislators seem to be pretty hot
on say on pay,” she says. (For legislative developments please see sidebar.)
Benefiting From Say on Pay?
Some experts say the fear
and uncertainty circling in boardrooms about say on pay is overblown. In
fact, some optimistic scenarios would have companies benefiting from say on
pay. First, say on pay in the U.K. has been heralded by some as promoting
more dialogue between boards and management that has resulted in a more
collegial atmosphere. Second, if — and some say when — another financial
crisis hits and shareholders try to pin executive pay as part of the
problem, companies whose shareholders ratified their pay packages will have
a clear defense.
On the other hand, at companies whose shareholders vote against the pay
packages, boards will likely be under pressure to act. While say on pay
gives nonbinding authority to shareholders, if comp committee members refuse
to make changes to compensation, they could be targets of a no-vote campaign
against their re-election at the following annual meeting, Wetzel says.
A say-on-pay mandate would also hit the pocketbooks of small companies the
hardest. Some small companies have only one in-house attorney, so they would
have to contract out for legal guidance, Wetzel says.
It would also put more work on the board, says Newmont Mining’s Taranik.
Compensation disclosure requirements are already extensive, and under an
SEC proposal, companies might be forced to
spend more money to comply.
Wetzel says the best advice for directors in preparing for say on pay is do
an audit of how the compensation committee comes to its pay decisions.
“Redirect your focus to the goals of the company before deciding executive
comp,” she says. “If you want to give executives a bonus, ask what the bonus
is intended to achieve and diversify your goals so that the sole goal is not
just to build up the stock price.”
She suggests comp committee members should receive training at least once a
year to make sure they understand what their duties are to shareholders and
go through ethical dilemmas boards may face.