Will “Say on Pay” Make a Difference?

Shareholders finally have their “say on pay”—sort of. Thanks to a feature of the Dodd–Frank Wall Street Reform and Consumer Protection Act, beginning this year companies are required to give shareholders an advisory vote on executive compensation plans.

But that vote is nonbinding, as is a required shareholder vote on how often they want to have their say on pay—every one, two, or three years.

Dodd-Frank also mandates an advisory vote on “golden parachutes,” the payout bonuses that executives get in the event their company is acquired. That vote occurs only in the special proxy where shareholders approve or block the merger.

Companies with a market cap below $75 million are exempt from these requirements until 2013.

About 120 companies held say-on-pay votes already last year, before the Dodd-Frank mandate, according to RiskMetrics, a New York–based corporate governance consulting firm. For example, U.S. Bank and Wells Fargo had to give shareholders the vote as long as the banks had not fully repaid their federal TARP (Troubled Asset Relief Program) loans. General Mills responded to a 2009 shareholder proposal calling for a say-on-pay vote. But no company has held a say-on-pay vote completely voluntarily, without pressure.

Ted Allen of RiskMetrics observes that companies are beginning to recommend an annual say-on-pay vote now, concluding that if they don’t, shareholders unhappy with the compensation plan “won’t have any recourse except to vote against comp committee members” in off years. “For board members,” Allen says, “a vote against the compensation committee feels more like a personal rebuke” than a negative vote on the compensation report does.

Because the Dodd-Frank votes are nonbinding, many observers don’t believe the measures will be effective tools for shareholders. Here’s what three local observers anticipate as the new rules are implemented.

Tim Hearn, Corporate Partner, Dorsey & Whitney, LLP

“It’s going to be an interesting few years. The executive compensation industry is probably going to come up with a model more palatable to shareholders. Managements will look for compensation structures that can satisfy their business needs, attract and retain talent, and win shareholder support.”