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“Say On Pay” To “Listening On Pay” by Tim Smith From the Summer 2010 issue of ValuesIn 2006, Walden Asset Management filed its first shareholder resolution asking a company to institute an annual advisory vote on executive compensation, soon to be dubbed “Say on Pay.” The resolution built on the pioneering work of AFSCME, which filed the first such resolutions in 2005. Initial votes in favor of this governance reform showed very encouraging investor support, often greater than 40 percent. Engagement on Say on Pay was inspired by its practice in the United Kingdom, which had required annual advisory votes since 2002. That process prompted considerable in-depth dialogue between corporate boards and investors on executive compensation, frequently resulting in specific changes in pay philosophy and practice.
In the United States, investors began working together—writing letters, talking to companies, and filing resolutions—ultimately encompassing 75 investors with more than $1 trillion of assets under management. Soon some resolutions began receiving majority votes and, more importantly, companies agreed to implement Say on Pay, led initially by AFLAC.
Stimulated by this new public debate, a group of more than 20 companies and investors formed a working group to dig into the details of providing shareholders the advisory vote. Jointly led by Pfizer, AFSCME, and Walden, the working group also sponsored two roundtables to explore the reform. These sessions were attended by more than 125 companies, investors, and compensation experts. The working group prepared and distributed various background papers on the issue, but did not come to a consensus. Critical differences between investors and companies made that impossible. The very existence of the working group as a cooperative exercise in tackling an important new governance proposal, however, raised the comfort level for many companies. Equally important, the process helped inform members of the U.S. Congress that Say on Pay legislation was a reasonable check and balance on executive compensation that had widespread investor support.
Meanwhile, the public debate on executive compensation reached new levels of focus and controversy, especially during the grinding economic crisis. Hundreds of companies subject to TARP were required by the Treasury to institute Say on Pay votes, giving the financial industry hands-on experience. Executive pay was unlikely to slip off the radar screen. Fast forward to 2010: Approximately 70 companies have voluntarily agreed to implement Say on Pay. That’s a remarkably short period of time for a new corporate governance practice to begin to take hold. Moreover, shareholder resolutions requesting the advisory vote in the last two years have received majority support at over 30 companies, the most recent being a 62 percent vote at the healthcare company Well-Point. This dovetails neatly with the recent U.S. Senate vote on financial reform that includes a requirement for annual Say on Pay votes, making such votes a certain part of financial reform legislation. When President Obama signs this bill, one small but significant part of it will be this long awaited new tool that brings greater accountability on executive compensation.
Now, we move into a new phase. If investors have Say on Pay annually, how do we encourage companies to “listen on pay?” The worst case scenario is that investors receive a ritualized right to vote but companies do not open their ears to shareholder concerns. Of course, when a majority of votes are cast against management-backed compensation proposals, such as with KeyBank, Motorola, and Occidental Petroleum this proxy season, boards are virtually compelled to act. But in the case of State Street, for example, where there is a more modest but still meaningful 15 percent vote against compensation practices and the Chair of the Compensation Committee is not supported by 11 percent of shares voted, what should the company do? To their credit, State Street’s Compensation Committee Chair and senior executives met with Walden and thoughtfully discussed its compensation policies and trends.
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