Issuers who hold their annual shareholders meeting after January 21, 2011, will have to implement say-on-pay as part of their proxy process. At this first annual meeting, shareholders must also decide on the frequency of the say-on-pay vote, such frequency also becoming known as "say-when-on-pay." The purpose of this Post is to discuss issues that should be considered when implementing say-when-on-pay.
Addressing the frequency of say-on-pay, issuers must offer shareholders the following four choices: annual, biennial, triennial and abstention. Thereafter, the vote on frequency must be held by a separate resolution no less than once every six years.
Worth noting is that a majority of the issuers who have filed proxy statements this season have recommended triennial say-when-on-pay.
Some Reasons to Adopt an Annual Vote
- There is a belief that annual votes will become routine, similar to annual ratification of an issuer's outside auditors. Those following this thought believe that the scrutiny associated with an annual vote will eventually be less than the scrutiny associated with a biennial or triennial vote.
- Another thought is that shareholder dissatisfaction is likely to be expressed in the say-on-pay process as opposed to utilizing withhold/no votes on compensation committee members. Thus, as the thought goes, compensation committee members are more protected with annual say-on-pay.
- ISS recommends annual voting.
- There is real time disclosure and shareholder feedback associated with annual voting.
- For those issuers with poor pay practices, annual voting may be preferred so that the taint associated with a no vote does not last for two or three years (as it would if biennial or triennial voting were implemented).
Some Reasons to Adopt a Biennial or Triennial Vote
- A biennial or triennial vote helps shareholders evaluate the long-term effects of an issuer's multi-year compensation structures. In contrast, an annual vote encourages short-term thinking and focuses on interim results, such as a decrease in stock price.
- Preparing for and implementing say-on-pay on an annual basis may be costly and mis-directs the attention of management.
- Assuming shareholders express negative thoughts during the say-on-pay process, the compensation committee may need to time implement changes to various compensation policies and procedures.
- Some investors prefer a voting frequency that is longer than annual voting (e.g., the United Brotherhood of Carpenters prefers triennial voting).
- Certain registered institutional investment managers may find that annual reporting to the SEC on how they voted is too burdensome for every portfolio company.
Recommendation from the Issuer
Issuers have the opportunity in their proxy statement to recommend a voting frequency. The following are some examples of recent examples (and links to their proxy statements) where issuers have recommended a frequency vote or have affirmatively abstained from such recommendation (or you can go here where I have cut and paste the applicable language into this PDF):
- Annual vote recommendation filed by Navistar International Corporation in its proxy statement on January 14, 2011.
- Biennial vote recommendation filed by Fair Isaac Corporation in its proxy statement on December 27, 2010.
- Triennial vote recommendation filed by Tyco International Ltd. in its proxy statement on January 14, 2011.
- Affirmative abstention from any recommendation filed by Jack In The Box, Inc. in its proxy statement on January 13, 2011.
Any Worries with Recommending other than an Annual Vote?
For issuers who prefer other than an annual vote but are worried that such a recommendation may not succeed, consider offering an olive branch such as:
- A written commitment in the recommendation that the issuer will resubmit its say-when-on pay the following year if the biennial or triennial recommendation does not receive the affirmative vote of a majority of the shareholders.
- A written commitment in the recommendation that the issuer will resubmit the say-when-on-pay proposal at such biennial or triennial vote.
As a concluding thought, for those of you who are responsible for implementing say-on-pay and say-when-on-pay internally at the issuer, do not forget to set internal expectations as to what is an acceptable percentage of "no" votes. It may be that your team thinks 10% or 20% "no" votes is acceptable, whereas your compensation committee may find such percentage appalling (or vice versa).