Say on Pay has become a lightning rod for shareholder protest. Despite the loud cries, however, many shareholders have approved pay as usual for CEOs. Perhaps the fault lies with these same shareholders, who end up approving compensation that pays for performance – and pays for failure. As CEOs, corporate secretaries and shareholder groups will learn from reading this article, much work remains to be done before the protests achieve their intended goal.

In 2007, the real start of the Say on Pay campaign in the United States, no one would have predicted that, by the 2009 proxy season, there would be over 400 companies with a management proposal to approve executive compensation. But then few would have predicted the collapse of the markets, the government bailouts and the election of Barack Obama.

Back in 2007, company secretaries were reeling from the onerous, new SEC disclosure regulations. As if this were not enough to cope with, a major shareholder campaign to introduce an advisory vote on executive compensation was launched. . The campaign, orchestrated by a significant group of institutional stockholders, led to the launch of shareholder resolutions at over 50 major U.S. corporations.

Before discussing the state of Say on Pay today, we should review its past. While its history is a relatively short one in the U.S., it is longer elsewhere and longest in the United Kingdom. The first official indication that the UK was considering introducing a non-binding vote on executive compensation, or remuneration (as it is referred to there), came in July 1999, when Stephen Byers, a former U.K. Secretary of State for Trade and Industry, announced that such a policy was being considered. It took some time, but in August 2002 the U.K. government introduced the Directors’ Remuneration Report, regulations which included the requirement to put a remuneration report to a shareholder vote at each annual general meeting.

However, even before the regulations were put in place, companies had started submitting remuneration committee reports to a vote as early as 2001. The number of companies doing so increased sharply in 2002, before legislation was introduced. During this period, according to a National Association of Pension Funds (NAPF) report, very few companies were against remuneration reports. Only 14 companies in the FTSE 100, for example, registered over 2.5 percent of voting capital against compensation reports, with the highest being only around 10 percent against.

The GlaxoSmithKline controversy

While the U.K. introduction seemed relatively quiet and painless, the first year of official voting actually saw a shareholder rebellion. In May 2003, after the remuneration report vote became mandatory, the first company felt the full force of shareholder disapproval. It was the pharmaceutical giant GlaxoSmithKline (GSK), which suffered a defeat at its annual general meeting when shareholders voted against the remuneration report. The results indicated that 50.72 percent of the votes were cast against.

It is sometimes claimed that a vote against a remuneration report, or as it will be known in the U.S., Compensation Discussion and Analysis (CD&A), is a blunt instrument, as it is not clear just what shareholders are objecting to. However, in the GSK instance, and indeed as we shall see in more recent protest votes, it was very clear what shareholders found objectionable. For GSK, the item in question was an employment agreement with its CEO Jean-Paul Garnier, one that would have been regarded as moderate in the U.S. but was considered excessive in the United Kingdom.

Again, opponents often point to the non-binding nature of most Say on Pay votes, claiming that companies will simply ignore shareholders’ discontent. But in this instance, the company’s response was far from ignoring shareholders. It quickly asked Deloitte & Touche, its compensation consultants, to conduct an independent review and report back in 2004.

The proposed employment agreement for Mr. Garnier contained severance provisions for salary and bonus continuation of two years, with all the normal U.S. bells and whistles – outplacement counseling, excise tax reimbursement, immediate vesting of equity awards and the like. However, by the time the agreement was signed, in March 2004, and subsequently approved by shareholders, the terms had been cut back to a plain one year’s salary and bonus continuation, with equity vesting governed by the respective incentive plans. The excise tax gross-up was maintained, but given that such severance was unlikely to trigger it, this was based more in theory than reality.

This might have been the signal for a new contentious era in U.K. executive compensation but, while a number of near misses and controversial rows followed – at telecommunications giant Cable & Wireless and telecom company Vodafone, for example – there were no major rebellions… until 2009.

Why a period of quiet?

Given the imminent introduction of Say on Pay in the U.S., and the fierce corporate opposition to it, a brief discussion of why this period of relative tranquility occurred is useful. The key can actually be found in a phrase from the GSK annual report that was published in the year following the rebellion. The phrase in question was: “…further discussions with shareholders.” In each of the cases where controversy appeared to have been brewing, behind-the scenes-discussions between the company and major institutional shareholders were taking place. This was the reason why shareholder rebellions did not occur.

In most cases in the U.K. today, companies regularly work closely with shareholders to ensure that there is full agreement on pay issues – mostly those having to do with equity incentive plans – prior to the annual meeting. Sometimes, companies will have to incorporate changes in order to gain this support, but in many cases, communication – and not communication that would fall afoul of insider information securities legislation – is sufficient.

Practice has spread to Europe and Australia

Perhaps because of the lack of continued controversy, the practice of submitting remuneration reports to shareholder votes has spread. A year after the U.K. made the practice mandatory, the Netherlands took it a step further by requiring companies to submit remuneration reports to a binding vote. And in 2005, Sweden and Australia both adopted requirements for non-binding shareholder votes on remuneration reports. It is significant that each of these countries has significant requirements for pay disclosure. Since then, Norway, Spain, Portugal, Denmark and, most recently, France, have followed suit. And Germany is now among a number of countries currently considering introducing legislation. In Canada, as of the end of April 2009, 12 of the country’s largest companies have agreed to give their shareholders a non-binding vote on executive compensation.

What of the practice in the United States?

It has always been claimed that the practice would never catch on in the United States. But as far back as 2005, Escala Group, Inc. (a global collectibles company {stamps and antiques}), issued a proxy statement on October 28 noting that management would put both the outgoing CEO’s (Greg Manning) and the incoming CEO’s (Jose Miguel Herrero) compensation packages up for a shareholder vote. However, the initiative was an outlier at the time.

But then came the 2007, 2008, and 2009 proxy seasons, and the Say on Pay campaigns. In 2008 and 2009, the bills calling for Say on Pay began to pile up on desks in Congress. These included The Protection Against Executive Compensation Abuse Act, sponsored by Representative Barney Frank, Senator Charles Schumer’s Shareholder Bill of Rights, the Treasury Department’s financial stability rules, and the SEC’s own agenda. Say On Pay now seems an inevitability, given President Obama’s manifest support for it.

The most recent U.S. developments

In the 2007 proxy season, there were about 50 shareholder resolutions calling for an advisory vote on executive pay. In 2008, this number rose to more then 90 resolutions. Resolutions garnered average support of 40.8 percent in 2007, and a majority of support at eight companies. Average support for Say on Pay proposals from 2007 to 2008 increased modestly, from 40.8 percent to 41.7 percent. Of course, in 2008, two companies – Aflac and RiskMetrics – actually had a vote on Say on Pay. Both received solid majority support for their pay policies. Then in March 2009, the SEC reacted to legislation in the American Recovery and Reinvestment Act (ARRA) that would require all companies receiving funds from the U.S. Treasury to place a Say on Pay vote on their ballot. This meant that roughly 400 companies would have to have such a vote. While these were mostly banks, other companies, such as Motorola and Verizon, also introduced votes as a result of resolutions supported by a majority of their shareholders.

In total, Say on Pay has been the subject of more than 200 shareholder proposals over the three proxy seasons between 2007 and 2009. Support for such proposals has waxed and waned. Some companies, like Apple and Motorola, have reacted to majority support for such resolutions by introducing or promising to introduce a Say on Pay vote. Others, such as Ingersoll-Rand, have ignored the majority of their shareholders and made no such moves. But the various recent legislative actions appear to have deflated the shareholder campaign, with support levels for shareholder Say on Pay proposals in the current proxy season remaining, on average, at 40 percent, the same as in 2007 and 2008. As well, Aflac and RiskMetrics, the two companies which actually held a shareholder vote on pay at their 2008 and 2009 annual meetings, experienced very high levels of support. Even companies that actually had a vote on pay on the agenda, saw support for excessive pay as usual remain strong.

Even with all the talk of pitchforks, torches, and angry mobs on Wall Street, Verizon – hardly a paragon of compensation best practices – saw the pay package it put forward receive 90 percent shareholder support. And what of Bank of America, where support topped 70 percent? Surely one would have thought the Merrill Lynch bonus fiasco alone would have been enough to provoke more significant protest. With even higher support, Goldman Sachs’ compensation plan received 98 per cent support, perhaps because total remuneration dropped from more than $70m in 2007 to a mere $26m in 2008. And around 85 percent of Citigroup’s shareholders backed its pay proposal, even though the company’s CEO and chairman were both hauled in front of a congressional committee earlier this year, to answer questions about their involvement in the financial crisis.

So there has been little protest in the U.S., despite the furor over executive compensation the economic crisis, the collapse in the markets, and shareholders reeling from the consequent loss of value. Perhaps shareholders had more important things to worry about or perhaps they simply couldn’t get organized in time. But with this level of protest at such a time, corporate opposition to Say on Pay is really beginning to look histrionic.

Protest votes in Europe

This level of apparent disinterest, however, was not experienced on the European continent, where again it was left to shareholders to protest. The most recent votes on executive remuneration show a marked difference between Europe and the U.S., with “No” votes at Royal Bank of Scotland (RBS), Shell, and French auto parts maker Valeo, versus “Yes” votes at Verizon and Bank of America. Admittedly, RBS’s current woes are significant, subject as it is to shareholder lawsuits, share price collapse, and general shareholder fury. Shell’s decision to pay out its performance shares even though the company did not hit the targets it had set was also not one to garner much support. Perhaps, then, it is no surprise that shareholders revolted there. And a substantial severance package for Valeo’s CEO, Thierry Morin, was rejected by 98.62 percent of shareholders following the release of secret conversations between the board and M. Morin. While we have seen no reaction from Valeo or Shell yet – except red faces – the sensitivity of companies to this “non-binding” vote is again highly apparent by the fact that former RBS CEO Fred Goodwin agreed to a 50 percent cut in his pension.

Why is the furor over pay so much louder in the U.K., Holland, and France than it is in the United States? Perhaps with up to six years of voting on executive remuneration under their belt, European shareholders felt it was time to exercise their rights in larger numbers.


Despite this somewhat uneventful 2009 proxy season, corporations’ opposition to Say on Pay remains fierce. Opponents of the practice claim that shareholders already vote on the largest parts of executive compensation – annual and long-term incentive plans. But announcements of outsized severance packages during the last two or three years belie the assertion that incentives represent the largest element of compensation. Furthermore, a vote on a compensation plan is a vote on the theoretical application of a policy, not on the actual practice. It is a vote on inputs not outcomes. And the outcomes sometime come as something of a surprise, even to those shareholders who have approved them.

While some companies may be justified in fearing the implementation of such an advisory vote, this season has shown that most shareholders believe that the compensation paid is entirely reasonable and is tied to performance. Such companies should welcome this opportunity to formally vindicate the compensation committee’s decision making.

What are shareholders voting on?

But with Say on Pay, what are shareholders actually going to vote on? Are they going to vote on the amount of compensation? Are they going to vote on the change in the amount of compensation? Or are they actually going to be voting on compensation policy? Potentially, the subject of the vote will be all of the above, though surely the most important element of this is compensation policy. Poor compensation policy can be blamed for most pay problems and most instances where pay is delivered without performance. When compensation is delivered without regard to performance, shareholders look at the amount of pay and often object to that specifically, claiming it is excessive or that it is out of line with the market. But even where pay for failure is not readily identifiable by looking at actual pay levels, faulty compensation policy should still attract a negative vote because the potential for pay for failure is there. It is the policy that is the guilty party, in almost every case, not the actual amount. Identifying that faulty policy and acting on the discovery is going to be the job of shareholders from now on.

Leave a Reply

Please submit respectful comments only, including full name, professional title, and contact information (only name and title will be posted). Required fields are marked *