Prior to the market downturn in 2008, select corporate reform and consumer advocate groups lamented high executive compensation, particularly so-called “golden parachutes” paid to executives upon resignation or termination. However, by and large, the general population expressed little concern as long as the broad perception was that all stakeholders were benefiting from corporate performance. As we know, that perception changed drastically when companies failed to perform in recent years, and executives still received substantial payouts.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010, includes several provisions affecting executive compensation in publicly-traded companies. One requirement is that executive compensation be put up for a vote of approval by shareholders at least every three years. Known as the “Say on Pay” mandate, the shareholder vote is non-binding, such that a company’s board of directors may approve executive compensation packages even if most shareholders vote down the payments.
Out of the nearly 2,000 publicly-traded organizations that have held a vote this year, 52 failed to gain approval. This is up from 38 in 2011. While a “no” vote has no immediate ramifications against the company, executives or board members, it does draw undesirable attention and can lead to a negative impression of the organization. As a result, many companies are working to improve shareholder support with respect to executive compensation plans in advance of say on pay votes. Strategies include:
- Assessment of compensation committee composition and authority. There is a broad trend toward greater independence and disclosure, both for board members and retained advisors. Under new rules being finalized by the Securities and Exchange Commission, compensation committee members must be independent and have the authority to engage compensation consultant or other advisor at the company’s expense.
- Independent review of executive compensation packages. As expected, given the SEC rules noted above and the need for independent expertise, many compensation committees engage a compensation consultant to evaluate the competitiveness of compensation packages. One potential result of the Dodd-Frank Act is that companies’ identified peer groups will begin excluding any comparable firm that fails its say on pay vote or has a very high CEO-to-worker compensation ratio.
- Board discussions with the company’s largest shareholders to educate and justify executive compensation. It is increasingly important that the determinants for executives’ compensation are explained in detail and are largely based on objective criteria. Additionally, boards are using reports from corporate governance advisory firms, such as Institutional Shareholder Services, to identify compensation elements that may be unfavorable to better prepare for discussions with shareholders.
This year’s say on pay votes suggest that the vast majority of publicly-traded companies are providing executive compensation that meets shareholders’ approval. Nonetheless, as the demand for transparency and subsequent rulemaking grows, organizations must remain vigilant in ensuring compensation committee independence, evaluating the reasonableness of executive pay and keeping shareholders informed.
Re-blogged from Employer’s Web…Priya Kapila is a manager of compensation consulting services at CBIZ Human Capital Services. Working in CBIZ’s St. Louis office, Kapila handles various elements of compensation plan design for diverse organizations, including structuring executive compensation packages, developing performance-based incentive programs, and designing comprehensive salary systems. For more information on Priya Kapila and CBIZ Human Capital Services, please call (314) 692-2249 or visit www.cbiz.com/hr/.