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The article below was published in Agenda, a Financial Times private subscription service for corporate directors, and is presented with permission.

For reports cited in the article and for background on the referenced 2009 debates about the triennial voting alternative, see


Agenda, November 29, 2010 article


The week's news from other boardrooms




Article published on November 29, 2010

By Marc Hogan

What once looked to many observers like a clear-cut choice for corporate boards and management is hardly the case. More than four months after the Dodd-Frank Act established mandatory say-on-pay votes, the question of how often to hold such votes remains largely unsettled.

The 2011 proxy season will see non-binding shareholder votes on not only the pay plans themselves, but also the preferred frequency of such votes in the future: annual, biennial or triennial. Many directors and corporate officers initially expressed support for triennial votes. By contrast, ISS and many institutional investors have indicated their preference for annual votes.

Now, some companies are deciding it might be best to hold say-on-pay votes on an annual basis, after all. Robert Burrus, a director at Smithfield Foods, S&K Famous Brands and Amvest, said during Agenda’s November Exchange, “I have heard some companies say, maybe we’d like it to come up every year, because it will get people more comfortable with it, and then we’ll be more apt to get a favorable vote.”

Michael Melbinger, the chair of the employee benefits and executive compensation practice at Winston & Strawn, has noted a similar pattern. “A lot of companies started off reflexively — and myself included — thinking that, well, the less often the better,” Melbinger said during the Exchange. “But now, Bob, as you say, a lot of clients are coming around to thinking... that, well, maybe every year is a good idea.”

This shift in conventional wisdom results from a couple of factors. Companies are moving toward annual frequency partly because it accustoms investors to the process, so “it’s not a big special occasion to which they need to devote lots of resources,” Melbinger said. But another big reason annual voting might be better for companies is that a vote against pay is preferable to a vote against the director slate, he added.

Proxy solicitation firm Phoenix Advisory Partners echoes the latter point in a Nov. 3 client update posted by corporate governance blog On Securities. Many investors have said they would prefer to express dissatisfaction first through the say-on-pay vote, withholding votes from the compensation committee in later years if dissatisfaction continues, according to the update. If say on pay becomes the “canary in the coal mine” for future director withhold votes, companies providing biennial or triennial votes could face higher levels of compensation committee member withhold votes in years without a say-on-pay vote, the firm says.

Annual plans didn’t always look so appealing to corporate issuers. In July, Agenda reported that many directors favored triennial plans, following the logic that votes every three years would allow time to adjust to shareholder input. In August, ISS special counsel Pat McGurn wrote in an op-ed column for Agenda that “many boards will gravitate toward the least frequent (triennial) interval.”

There was ample precedent on which McGurn could base that prediction. Starting with Microsoft in 2009, various companies have adopted say-on-pay plans with votes less often than every year. Microsoft and Mobile Mini both went the triennial route. Pfizer, Prudential, Colgate and Bristol-Myers Squibb are among companies opting for biennial votes.

Microsoft, for its part, gave several reasons for choosing a triennial say-on-pay plan. First, the company’s compensation program is designed for a multi-year period, so say-on-pay votes “should occur over a similar timeframe,” the company said. Second, a three-year span provides enough time for investors to assess whether its pay plans have been effective. Microsoft said the three-year cycle also gives its board and compensation committee enough time to address shareholder feedback. Finally, the company noted that “pre-existing board requirements to seek shareholder approval of employee stock plans and other compensation-related matters give our shareholders an opportunity to provide feedback even in years when say-on-pay votes do not occur.”

Among institutional investors, support for annual pay votes is widespread, but not unanimous. Walden Asset Management sent a letter this fall to many U.S. companies calling for annual say-on-pay votes, with Afscme, AFL-CIO and the state of Connecticut among the co-signers. According to Phoenix Advisory Partners, however, T. Rowe Price has said it might approve less than annual frequency at companies whose pay practices it otherwise finds unobjectionable.

At least one large investor, the United Brotherhood of Carpenters, prefers triennial say-on-pay plans. In 2009, the carpenters union filed the first-ever triennial say on-pay-resolutions in the U.S. to no fewer than 20 companies, including Microsoft. The union likes triennial voting because it eases the burden on investors, corporate affairs director Ed Durkin told IR magazine at the time.

ISS expressed its support for annual say-on-pay votes last week as part of the proxy advisory firm’s latest updates to its proxy voting guidelines. The guidelines say ISS favors holding votes every year “because this provides the highest level of accountability and direct communication.”

“Having [say on pay] votes only every two or three years, potentially covering all actions occurring between the votes, would make it difficult to create meaningful and coherent communication that the votes are intended to provide,” ISS said in a release earlier this fall. “Under triennial elections companies, for example, a company would not know whether the shareholder vote references the compensation year being reported or a previous year, making it more difficult to understand the implications of the vote.”

In the director community as well, the frequency issue does not appear to be cut-and-dried. Among the 137 write-in responses to Agenda’s Directors’ and Officers’ Outlook survey for the fourth quarter, almost one third said they were still evaluating the legislation, waiting for a specific rulemaking from the SEC or planning to take a vote on frequency at the next board meeting.

If there is any consensus on say on pay, it’s that shareholder engagement is key. SEC chairman Mary Schapiro raised this point in an Oct. 19 speech to the National Association of Corporate Directors. And at least one provider, Towers Watson, has rolled out an online survey tool it says will help companies better understand what their shareholders think about their executive pay practices. The survey topics include say-on-pay frequency.


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