Has Dodd-Frank’s ‘Say On Pay’ Limited Executive Pay? Yes And No
This proxy season was the first in which U.S. companies were required to ‘say on pay,’ thanks to the enactment of a provision in the Dodd-Frank Act that mandates public companies to disclose their executive compensation policies and have shareholders vote on them.
This proxy season was the first in which U.S. companies were required to “say on pay,” thanks to the enactment of a provision in the Dodd-Frank Act that mandates public companies to disclose their executive compensation policies and have shareholders vote on them. But did saying ultimately have any impact on what companies are paying their top executives?
At first blush, the answer seems to be an obvious no. According to proxy advisory firm ISS, average investor support for company pay policies as of June 28 totals a whopping 91.2 percent, up from 89.2 percent support in 2010 (when only government-supported financial firms were subject to the say-on-pay requirement).
But those figures may not tell the whole story. Upon closer inspection, this near-complete support of executive pay packages doesn’t necessarily translate into an across-the-board wave of approval from shareholders. ClearBridge Compensation Group, an independent, New York-based executive compensation consulting firm, collected data from the first 100 companies from the S&P 500 that tallied their votes, and compared investor levels of support for their pay policies to the total return the companies delivered to their shareholders for the year, to see if a possible relationship might emerge. Sure enough, they found a relationship: Among those hundred companies, the level of support for compensation policies was directly correlated with the company’s total shareholder return for that year. In other words, as shareholder return plummeted, so did approval for pay practices. (The two companies from this group who garnered less than 50 percent shareholder support for say-on-pay votes returned an average of -13.3 percent for the year, while the 66 companies that received between 90 percent and 100 percent support for these policies averaged a 19.7 percent return during the same period.)
“Those companies that continue to increase pay despite shareholders seeing significant share losses are the ones that obviously are going to face more scrutiny from shareholders,” says Ted Allen, head of publications and governance counsel at ISS.
Say-on-pay did induce a handful of companies to proactively (or in some cases, reactively, upon the announcement of a “no” vote recommendation from a proxy advisory firm like ISS) tweak pay programs before they came up for the shareholder vote – another impact that doesn’t reveal itself in the final percentages of overall investor support. General Electric imposed performance hurdles that must be achieved before its CEO can see his company stock options vest, and Disney was one of several companies that eliminated its tax gross-up provision, which infamously inflates the size of executive severance packages.
But still, the larger question remains: Did say-on-pay have the intended effect on company pay practices?
“It all depends on what one believes it was intended to do,” says Russell Miller, managing director at ClearBridge Compensation Group. “If say-on-pay was intended to decrease the absolute pay levels of CEOs, I don’t think it’s going to do that. But if it was intended to improve the design of the pay programs to better relate pay to performance, I do think it’s achieving that goal.”