Shareholder Advisory Votes on Executive Compensation: The Preliminary Say on Pay and Say on Frequency Numbers

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On January 25, 2011, the Securities and Exchange Commission adopted final rules and amendments implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") which addresses shareholder advisory votes on:

  • executive compensation;

  • the frequency of shareholder votes on executive compensation; and

  • golden parachute compensation (collectively, the "Say on Pay Rules").

The Say on Pay Rules take effect for all companies, except for smaller reporting companies, on April 4, 2011. Smaller reporting companies are exempt from holding shareholder advisory votes on executive compensation (“Say on Pay”) and shareholder advisory votes on the frequency of Say on Pay votes (“Say on Frequency”) until their first annual or other shareholder meeting taking place on or after January 21, 2013, they are not, however, exempt from holding shareholder advisory votes on golden parachute compensation (“Say on Golden Parachute”).

Shareholder Advisory Votes

Notwithstanding the April 4, 2011 effective date of the Say on Pay Rules, the Dodd-Frank Act requires that any company holding a shareholder meeting on or after January 21, 2011 include in their proxy solicitation materials separate resolutions for Say on Pay and Say on Frequency votes.

Say on Golden Parachute votes are only required in connection with a proxy or consent solicitation for a merger, acquisition or similar transaction and only after the final Say on Pay Rules take effect.

Companies began filing proxy statements for their 2011 shareholder meetings in early December 2010. This Securities Law Update examines how these initial filers are addressing the new Say on Frequency requirements and how the results from the first Say on Pay and Say on Frequency votes are coming in.

First, what are proxy advisory firms and other shareholder organizations recommending regarding the Say on Frequency votes?

On December 16, 2010, Institutional Shareholder Services (ISS) issued its 2011 U.S. Proxy Voting Guidelines recommending that shareholders choose annual Say on Pay votes because they "provide the most consistent and clear communication channel for shareholder concerns" about executive compensation.

Glass Lewis & Co., in its 2011 Proxy Paper Guidelines, has stated "we believe companies should submit [Say on Pay] votes to shareholders every year ... absent a compelling reason. We believe annual [Say on Pay] votes encourage beneficial … dialogue on compensation and that the relatively minor additional financial burdens on a company ... are outweighed by the benefits to shareholders of more frequent accountability."

The Council of Institutional Investors (CII), in its Corporate Governance Polices, also recommends annual Say on Pay votes, as does the International Corporate Governance Network (ICGN) in its comment letter to the Commission regarding the Say on Pay Rules.

What are the boards of directors of the initial proxy filers recommending regarding the Say on Frequency votes?

As of February 22, 2011, 250 non-TARP participating companies have filed preliminary or definitive proxy materials containing Say on Frequency shareholder resolutions with the Commission. More than half, or 59%, of the boards of directors of these companies have recommended their shareholders approve a triennial Say on Pay vote, 30% have recommended an annual vote, 6% a biennial vote and 5% have made no recommendation.

Recommended Say on Frequency Vote
(All Filers)

Recommended Say on Frequency Vote (All Filers)

Large Accelerated Filers

Further breaking these numbers down by filer type, we can see that half of the boards of large accelerated filers (who make up 103 of the 250 companies in our sample) have recommended a triennial Say on Pay vote, with the next most frequent recommendation being an annual Say on Pay vote (suggested by 38% of boards).

Recommended Say on Frequency Vote
(Large Accelerated Filers)

Recommended Say on Frequency (Large Accelerated Filers)

Accelerated Filers

A majority, or 62%, of the boards of directors of accelerated files (who make up 69 of the 250 filers in our sample) have also recommended a triennial Say on Pay vote, with the next most frequent recommendation again being an annual Say on Pay vote (suggested by 26% of boards).

Recommended Say on Frequency Vote
(Accelerated Filers)

Recommended Say on Frequency (Accelerated Filers)

Non-accelerated Filers

Just over half, or 57%, of the boards of directors of non-accelerated filers (who make up just 14 of the 250 companies in our sample) have recommended a triennial Say on Pay vote, with next most frequent recommendation being an annual Say on Pay vote (suggested by 36% of boards).

Recommended Say on Frequency Vote
(Non-accelerated Filers)

Smaller Reporting Companies

Finally, more than two-thirds, or 69%, of the boards of directors of smaller reporting companies (who make up 64 of the 250 filers in our sample) have recommended a triennial Say on Pay vote, with next most frequent recommendation also being the annual Say on Pay vote (suggested by 22% of boards).

Recommended Say on Frequency Vote
(Smaller Reporting Companies)
Recommended Say on Frequency Vote (Smaller Reporting Companies)

Most of the smaller reporting companies in our sample filed their proxy materials prior to the Commission’s adoption of the temporary exemption from holding Say on Pay and Say on Frequency votes for such filers. However, even after the exemption’s adoption, a handful of smaller reporting companies have voluntarily included Say on Pay and Say on Frequency resolutions in their proxy solicitation materials.

As of February 22, 2011 smaller reporting companies made up more than a quarter, or 26%, of all proxy filers holding Say on Pay and Say on Frequency shareholder votes.

Proxy Filings by Filer Status

Proxy Filings by Filer Status

As the proxy season moves forward, and now that there is an exemption available, it will be interesting to see how this ratio changes.

What are some of the rationales given for boards of directors’ Say on Frequency recommendations?

Most companies explain the rationale for their boards’ Say on Frequency recommendations in their proxy solicitation materials. Some of the more common explanations include:

Annual Recommendations

Oshkosh Corporation (NYSE:OSK)

 We believe an annual advisory vote … will allow us to obtain information on shareholders’ views … on a more consistent basis … will provide our Board and the Human Resources Committee with frequent input from shareholders … [and] aligns more closely with our objective to engage in regular dialogue with our shareholders on corporate governance matters, including our executive compensation philosophy, policies and programs.

Visa, Inc. (NYSE:V)

 [A]n annual advisory vote … will allow our stockholders to provide us with their direct input on our compensation philosophy, policies and practices … [and] is consistent with our policy of seeking input from, and engaging in discussions with, our stockholders on corporate governance matters and our executive compensation philosophy, policies and practices.

Biennial Recommendations

Hormel Food Corporation (NYSE:HRL)

 A say-on-pay vote every two years strikes the right balance between having the vote too frequently … and being less responsive to stockholders ... [it] provides stockholders and advisory firms the opportunity to evaluate the Company’s compensation program on a more thorough, longer-term basis than an annual vote.

The Board believes an annual say-on-pay vote would not allow for changes to the Company’s compensation program to be in place long enough to evaluate whether the changes were effective. … [c]onversely, waiting for a say-on-pay vote once every three years may allow an unpopular pay practice to continue too long without timely feedback. A say-on-pay vote every two years is also sensitive to stockholders who have interests in many companies and may not be able to devote sufficient time to an annual review of pay practices for all of their holdings."

Key Technology, Inc. (Nasdaq:KTEC)

 [T]he Board has concluded that an advisory vote every other year on executive compensation would be the most suitable for Key based on … :

  • Our compensation program is designed to induce and reward performance over a multi-year period … a shareholder vote … should occur over a similar time frame;

  • A two-year cycle will provide investors sufficient time to evaluate the effectiveness of our short and long-term compensation strategies and the related business results of the Company;

  • Many large shareholders rely on proxy advisory firms for vote recommendations. We believe that a biennial vote … helps proxy advisory firms provide more detailed and thorough analyses and recommendations;

  • A two-year vote cycle gives the Board … sufficient time to respond to shareholders’ sentiments and to implement any necessary changes … ; and

  • The Board will continue to engage with shareholders on executive compensation between shareholder votes.

Triennial Recommendations

Tyson Foods, Inc. (NYSE:TSN)

 The Board believes that a triennial vote complements our goal to create a compensation program that enhances long-term shareholder value … our executive compensation program is designed to motivate executives to achieve short-term and long-term corporate goals that enhance shareholder value. To facilitate the creation of long-term, sustainable shareholder value, certain of our compensation awards are contingent upon successful completion of multi-year performance and service periods. A triennial vote will provide shareholders the ability to evaluate our compensation program over a time period similar to the periods associated with our compensation awards, allowing them to compare the Company’s compensation program to the long-term performance of the Company.

The Compensation Committee would similarly benefit from this longer time period … [t]hree years will give the Compensation Committee sufficient time to fully analyze the Company’s compensation program (as compared to the Company’s performance over that same period) and to implement necessary changes. In addition, this period will provide the time necessary for implemented changes to take effect and the effectiveness of such changes to be properly assessed. The greater time period between votes will also allow the Compensation Committee to consider various factors that impact the Company’s financial performance, shareholder sentiments and executive pay on a long-term basis. The Board believes anything less than a triennial vote will yield a short-term mindset and detract from the long-term interests and goals of the Company.

AECOM Technology Corporation (NYSE:ACM)

 [T]he Board of Directors recommends that future advisory votes on executive compensation occur every three years (triennially) … for a number of reasons, including:

  • Our compensation programs do not change significantly from year to year and we seek to be consistent;

  • Our compensation program does not contain any significant risks that might be of concern to our stockholders, as confirmed by a review performed by the Company … ;

  • A longer frequency is consistent with long-term compensation objectives; and

  • Our compensation programs are designed to reward and incentivize long-term performance and a triennial vote corresponds with the three year performance period under our long-term incentive awards.

In addition, we believe that a triennial advisory vote … reflects the appropriate time frame … to evaluate the results of the most recent advisory vote on executive compensation, to discuss the implications of that vote with stockholders ... , to develop and implement any adjustments to our executive compensation programs … , and for stockholders to see and evaluate the Compensation/Organization Committee’s actions in context. … .

The Board of Directors is aware of and took into account … that some stockholders believe that annual advisory votes will enhance or reinforce accountability. However, we have in the past been, and will in the future continue to be, proactively engaged with our stockholders … . Thus, we view the advisory vote on executive compensation as an additional, but not exclusive, opportunity for our stockholders to communicate with us regarding their views on the Company’s executive compensation programs. In addition, because our executive compensation programs have typically not changed materially from year-to-year and are designed to operate over the long-term and to enhance long-term performance, we are concerned that an annual advisory vote on executive compensation could lead to a near-term perspective inappropriately bearing on our executive compensation programs. … .

No Recommendation

Becton, Dickinson and Company (NYSE:BDX)

 The Board acknowledges that there are a number of points of view regarding the relative benefits of annual and less frequent say-on-pay votes. Accordingly, the Board intends to hold say-on-pay votes in the future in accordance with the alternative that receives the most shareholder support.

Jack in the Box Inc. (Nasdaq:JACK)

 Our Board has reviewed the evolution of Say on Pay proposals and considerations regarding the frequency of such proposals, and has carefully studied the alternatives in an effort to determine the approach that would best serve Jack in the Box and its stockholders. Our Board has heard many arguments supporting an annual vote, and equally compelling arguments supporting a vote every three years. Each position has advantages and disadvantages.

Arguments favoring a vote no more frequently than every three years include the following:

  • [O]ur compensation program ties a substantial portion of executive compensation to our long-term corporate performance … . Therefore, a vote every three years is best aligned with the long-term focus of our executive compensation programs, and prevents long-term objectives from being undermined by shorter-term issues in the marketplace;

  • A triennial vote will give our stockholders the opportunity to more fully and effectively assess our long-term compensation strategies and the related business outcomes;

  • A three-year cycle gives … sufficient time to thoughtfully evaluate and respond to stockholder input and effectively implement any changes to the Company’s executive compensation program; and

  • A three-year vote cycle reduces the burden on stockholders.

Arguments favoring an annual Say on Pay vote include the following:

  • Say on Pay votes are a communication vehicle, and communication can be most useful when it is received frequently;

  • Annual Say on Pay advisory votes may provide a higher level of accountability and direct communication … by enabling the vote to correspond to the information presented in the accompanying proxy statement for the applicable stockholders’ meeting; and

  • A failure to provide stockholder input every year might make it more difficult to understand whether a stockholder vote pertains to the compensation year being discussed in the current proxy, or pay practices from the previous year or two. This, in turn, might make it more difficult … to understand the implications of the vote and to respond to them.

The Board believes that the Company’s compensation practices are sound, and embody an appropriate long-term perspective. We therefore do not believe that an annual Say on Pay vote is necessary. We recognize, however, that some of our stockholders might welcome the opportunity to communicate more frequently with the Board and the Compensation Committee regarding the Company’s pay practices, and view the Say on Pay vote mechanism as the best way to do so. Because we are comfortable that we can effectively implement any frequency resolution that the plurality of our voting stockholders recommend, we will leave it to our stockholders to inform us … which frequency they would prefer we adopt.

When will the results of the Say on Pay and Say on Frequency votes be available?

The first shareholder meeting with a Say on Pay and Say on Frequency vote was scheduled for January 24, 2011, and a company is required to disclose the results of its Say on Pay and Say on Frequency votes on a Form 8-K within four business days after its meeting (so, in the case of the first company, on or before January 28, 2011).

The final Say on Pay Rules also require a company to amend its initial Form 8-K filing within 150 days of the meeting (but in no event later than 60 days before the deadline for submission of shareholder proposals for its next annual meeting), to disclose its decision regarding how frequently to conduct future Say on Pay votes.

What constitutes a successful vote?

There is no shareholder approval threshold required for the Say on Pay and Say on Frequency votes. However, the Say on Pay Rules do allow a company to exclude certain shareholder proposals that relate to Say on Pay and Say on Frequency votes if its shareholders approve a single Say on Frequency choice by a majority of the votes cast and a company policy is adopted that is consistent with that shareholder choice.

In December 2010, Towers Watson, a global consulting firm, conducted a poll of 135 large U.S. public companies and found that a full 49% of them did not know when to consider a Say on Pay or Say on Frequency vote successful. Among those companies that did define a successful outcome, the majority felt that a shareholder vote of at least 80% would be required

As of February 22, 2011, 87 companies have disclosed the results of their initial Say on Pay votes. Of these companies 817% have considered their Say on Pay vote successful if it has received a majority of shareholder votes, 13% have not specified what they considered to be a successful outcome and 1%, or 1 company, considered its Say on Pay vote successful if it received a plurality of shareholder votes.

Say on Pay Voting Threshold

As of February 22, 2011, 88 companies have disclosed the results of their initial Say on Frequency votes. Of these companies 68% consider the choice that has received a plurality of votes to be the Say on Frequency choice of shareholders, 16% consider the choice that has received a majority of votes to be the Say on Frequency choice of shareholders, and the remaining 16% have not specified a shareholder choice threshold.

Say on Frequency Voting Thresholds


How are the results of the initial Say on Pay votes coming in?

Of the 87 companies that have disclosed the results of their initial Say on Pay votes 97% have reported that shareholders have voted to approve executive compensation by a majority of the votes.

Say on Pay Voting Results


Breaking the numbers down a bit further, we can see that 87% of companies have achieved a Say on Pay shareholder approval rate of 80% or greater. Ten percent of companies have achieved a shareholder Say on Pay approval rate of between 50% and 79%, and the remaining 3% of companies have achieved a shareholder Say on Pay approval rate of between 40% and 49%, meaning shareholders did not approve their Say on Pay proposals.

Say on Pay Voting Results by Approval Percentages


How are the results of the initial Say on Frequency votes coming in?

Of the 88 companies that have disclosed the results of their initial Say on Frequency votes 68% have reported that their shareholders have voted to approve either the same Say on Frequency choice as recommended by their board of directors or, where the board of directors has not made a recommendation, an annual, biennial or triennial Say on Frequency choice. The remaining 32% of companies have reported that their shareholders have voted to approve an annual Say on Frequency choice as opposed to the biennial or triennial choice recommended by their board of directors.

Say on Frequency Voting Results


Of the 88 companies that have disclosed the results of their initial Say on Frequency votes 55% of their boards of directors had recommended a triennial vote, whereas only 29% of their shareholders approved a triennial vote. In contrast only 27% of boards of directors had recommended an annual vote, whereas 65% of shareholders approved an annual vote.

Say on Frequency Board Recommendations




 Say on Frequency Shareholder Votes


2011 is definitely making for an interesting proxy season and we will continue to keep you up to date on the latest Say on Pay and Say on Frequency developments.


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Vanessa J. Schoenthaler
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