Why Say on Pay Matters

imagePublic companies are all faced with a non-advisory shareholder vote on executive compensation, called “Say on Pay,” stemming from Dodd-Frank. The vote is required every three years, but the best practice is to put this item in the proxy statement annually.

The vast majority of public companies sail through this vote just fine, with approval ratings in the 90% or higher range. But if a vote is below 75% or 80%, it is a red flag that there is dissent surrounding an organization’s compensation program.

So what can companies do? They should reach out to their large holders and listen to their objections. Then the board can thoughtfully discern what can potentially change for the next proxy season.

A logical question: Since it’s a non-binding vote, why does it matter? And in one sense, it doesn’t. But in the realm of reputation management, a vote below 75% is a negative blow to the corporate brand. And a no vote – less than 50% – is a more serious reputation hit.

Depending on the size and visibility of the company, the prospect of a potential non-approval vote is reported ahead of time in national media outlets, such as The Wall Street Journal. And if non-approval does result, a second negative story appears. The theme centers around a “tin ear” for good corporate governance. A number of large, successful corporations have been stung by shareholder disapproval of their plans.

Smaller companies that tend to not be known nationally can expect unflattering press in their headquarters market – never a plus for talent recruitment and retention.

The simplistic path to avoiding all of this is for companies to have executive comp plans that align with their peer group and with the broader corporate universe overall. However, there can be good reasons that organizations may be above their peers – the need to attract and keep a management team in a turnaround situation, for instance.

If this is the case, companies must have a ready explanation for their shareholders and take their rationale to them – and respond, without being defensive, to the media.

Not an easy task by any means… but part and parcel to being a public company in 2014.

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