April 21, 2007
Say on Pay
Posted by Gordon Smith

Yesterday, the U.S. House of Representatives passed the "Shareholder Vote on Executive Compensation Act," a.k.a., the "Say on Pay" bill. The bill provides, in relevant part:

Any proxy or consent or authorization under this section shall permit a separate shareholder vote to approve the compensation of executives as disclosed pursuant to the Commission’s compensation disclosure rules (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material). The shareholder vote shall not be binding on the board of directors and shall not be construed as overruling a decision by such board.

The bill also requires a separate advisory vote on "golden parachutes." According to House Committee on Financial Services (i.e., Barney Frank):

The nonbinding advisory vote will give shareholders a mechanism for supporting or opposing a company's executive compensation plan without micromanaging the company. Knowing that they will be subject to some collective shareholder action will help give boards more pause before approving a questionable compensation plan.

Shareholders already have the option of offering advice to the board of directors through shareholder proposals. Such proposals cannot be excluded from the company proxy statement under Rule 14a-8. In a 1992 no-action letter, the staff of the SEC wrote, "proposals relating to senior executive compensation no longer can be considered matters relating to a registrant's ordinary business."

Last year seven "say on pay" proposals garnered an average of 40% of the shareholder vote. This year a number of other companies have been forced to include "say on pay" proposals in their proxy statements. The first votes of the season occurred last week, with "nearly 47 percent of Bank of New York shareholders and 37 percent of Morgan Stanley shareholders support[ing] the proposal." (WaPo story)

Wal-Mart shareholders will be voting on a proposal this summer. Here is the proposal from Wal-Mart's proxy statement, which was filed earlier this week with the SEC:

Resolved, that the shareholders of Wal-Mart Stores, Inc. ("Wal-Mart" or the "Company") urge the board of directors to adopt a policy under which shareholders could vote at each annual meeting on an advisory resolution, to be proposed by Wal-Mart's management, to ratify the compensation of the named executive officers ("NEOs") set forth in the proxy statement's Summary Compensation Table (the "SCT") and the accompanying narrative disclosure of material factors provided to understand the SCT (but not the Compensation Discussion and Analysis). The proposal submitted to shareholders should make clear that the vote is non-binding and would not affect any compensation paid or awarded to any NEO.

Aflac has already agreed to implement a shareholder advisory vote, and other companies are studying the issue. I have serious reservations about the wisdom of Say on Pay -- my guess is that the votes will be pretty "noisy," not resulting in much useful information to the board of directors but imposing additional costs and providing another forum for protest -- especially if this reform is to be implemented via another one-size-fits-all "solution" from Congress.

Steve Bainbridge is promising a forthcoming editorial on this issue.

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