E

xecutive compensation decision makers at publicly traded companies faced the 2011 say-on-pay vote mandated by the 2010 Wall Street Reform and Consumer Protection Act (Dodd-Frank) with apprehension.¹ For the first time ever, longstanding executive compensation practices and conventions would undergo intense investor scrutiny and be subject to their (nonbinding) approval.

In anticipation of the initial say-on-pay vote, many companies revised what could be perceived as poor pay practices and learned how to better communicate about pay with their investors. These actions, buoyed by a relatively healthy stock market at the time of the vote (see the graph below), meant that most publicly traded companies (i.e., more than 90 percent of the Russell 3000 Index) received a “for” say-on-pay vote.

Because of this first-year success, compensation decision makers may be lulled into complacency when looking ahead to the 2012 proxy season. Some may think, “We got over 90 percent approval on our say-on-pay vote last year, which was well above the minimum requirement of 50 percent. No need to worry about the 2012 vote.” Regrettably, a struggling economy, a volatile stock market and evolving governance protocols suggest otherwise. Rather than fade into a routine procedure similar to the annual ratification of the independent accounting firm, the say-on-pay vote has emerged as a high-profile component of the executive compensation decision-making process, one that requires continued, disciplined oversight.

In anticipation of the 2012 say-on-pay vote, institutional investors and their advisors are refining their analytical approach, particularly around the alignment of pay with performance.² Moreover, the Securities and Exchange Commission (SEC), as required by Dodd-Frank, will further influence say-on-pay outcomes when it issues its pay-for-performance and pay-parity disclosure requirements.

Call to Action

Compensation committees and corporate management need to “up their game” for the 2012 proxy season and its accompanying say-on-pay vote. The game plan requires stronger analytics, more transparent disclosure and evidenced alignment of pay with performance. To “win the vote in 2012,” compensation decision makers must take steps to:

• Foster a non-complacent, collaborative, fact-based executive compensation and governance decision-making, design, delivery and disclosure process,
• Assess the company’s actual alignment of pay with performance, taking into account findings from the 2011 say-on-pay vote, institutional advisory perspectives and an objective audit of the company’s compensation realities,
• Enhance plan designs to strengthen the alignment of pay with performance and address the unique needs of the business and its executives, and
• Improve the execution of executive compensation decision making at the leadership level.

Assessment Framework

To help companies assess the state of their executive compensation programs, Sibson Consulting has developed an assessment framework that consists of two checklists, the “Outside-In Audit” and the “Inside-Out Audit.” Executive compensation decision makers can use the “Outside-In Audit” (see table 1 below) to identify the “outsider” context in which the company’s executive compensation decisions and corresponding disclosures are evaluated.

The “Inside-Out Audit” (see Table 2 below) can be used to test the company’s pay plan designs, decision-making process and disclosure against outsiders’ standards and expectations.

By compiling and reviewing the data required to answer the questions in these tables, companies can identify the vulnerabilities in their executive compensation programs. These vulnerabilities should be addressed through redesign and disclosure in preparation for the 2012 say-on-pay vote.

Conclusion

Although the results of the first say-on-pay vote in 2011 were overwhelmingly positive, executive compensation decision makers should not become complacent. The economic, financial, regulatory and legislative environments are uncertain and continue to change. A “for” vote in 2012 is far from a sure thing. Steps need to be taken to prepare the company for another “big win”: a second successful say-on-pay vote.

About the author:

Myrna Hellerman is a senior vice president in the Chicago office of Sibson Consulting. She advises management and boards in the design and implementation of innovative, effective and sustainable people and reward strategies that lead to improved business results. She can be reached at 312.456.7914 or mhellerman@sibson.com.

---

¹ The legislation, which President Obama signed into law on July 21, 2010, requires public companies to provide their shareholders with a non-binding vote to approve the compensation of senior executives. Say-on-pay gives shareholders a voice in how the top five named executive officers are paid. These votes are also a way for a corporate board to determine whether investors view the company's compensation practices to be in the best interest of shareholders.
Back to article.

² For example, Institutional Shareholders Services, Inc. (ISS) has released its U.S. Corporate Governance Policy 2012 Updates.
Back to article.

Copyright © 2011 by The Segal Group, Inc., the parent of The Segal Company. All rights reserved.