New SEC rules requiring companies to obtain an advisory shareholder vote approving executive compensation went into effect one year ago as part of the corporate governance reform measures under the Dodd-Frank Wall Street Reform Act of 2010.
Today, executive compensation remains a hot button issue and companies and investors alike are anxious to gauge the impact of the new rules and predict what the coming proxy season holds.
Before setting expectations for proxy season 2012, let’s take a look back at 2011 and assess how the SEC’s new rules may already be changing behavior.
In the first year under Dodd-Frank, the SEC required two votes. The first was the Say on Pay vote, giving shareholders the opportunity to endorse (or oppose) a given company’s executive compensation program. Most companies received strong support for their pay programs. Among the S&P 500, the median vote on Say on Paywas 93 percent in favor of executive compensation programs. All the hype over highly-paid executives was not born out in shareholder voting.
But while a high percentage of companies’ compensation programs passed muster with shareholders, levels of support varied. Companies that performed better tended to get better votes. The average total shareholder return of companies where ISS, the proxy advisory firm, recommended a “Yes” vote on Say on Pay was 24 percent, compared to 10 percent for companies where a “No” vote was recommended.
The second new vote required by the SEC was a frequency vote asking shareholders to decide whether a Say on Pay vote should occur annually, every other year or every three years. Shareholders responded vigorously, expressing an overwhelming preference for annual voting. Even when Say on Pay proposals passed handily, shareholders did not support proposals for less frequent voting at most companies. Among the S&P500, 26 percent of companies proposed biennial or triennial voting, but 80 percent of these proposals failed to gain support.