Survey Shows Companies 'Moderately Concerned' About Comparing Pay, Performance

(July 29, 2011) — A new survey by Towers Watson reveals that the first-ever say-on-pay proxy season had relatively little immediate impact on most public corporations in the United States.

However, the vast majority of companies are either planning or considering making changes to their executive pay-setting process and overall preparations for next year’s proxy season.

The heightened attention over say-on-pay among shareholders reflects their effort to obtain greater authority over executive pay following the financial crisis, when many investors expressed public outcry over extravagant pay practices. Investor advocates, pension funds, and shareholder groups have pushed for such a change.

“Most companies are breathing a sigh of relief now that the proxy season is over,” Doug Friske, global head of Towers Watson’s Executive Compensation consulting practice, said in a statement. “The same, however, can’t be said for many companies that received an ‘against’ recommendation from proxy advisory firms or failed to win the support of at least 80% of the shareholder votes cast on their say-on-pay resolutions. The survey findings, along with our consulting experience, suggest that these companies are taking shareholder views quite seriously and plan to respond in some way.”

Todd Manas, a director in Towers Watson’s Executive Compensation practice in New York, added: “We believe companies need to start thinking now in a proactive way about their strategy for next year’s proxy season. Even companies that won shareholder approval this year can’t assume they’ll receive a similar outcome next year. Confirming that a strong pay-for-performance linkage exists, reaching out to shareholders and improving their overall communication about how their company pays for performance will be critical, especially as advisory firms use their own measures for how executive pay ties to company performance.”

Furthermore, Towers Watson’s survey showed that most employers (64%) are only moderately concerned about having to show the relationship between executive pay and corporate performance, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

In January, the Securities and Exchange Commission (SEC) adopted rules that would give shareholders at public companies a nonbinding vote on executive compensation packages.The regulator plans to propose and finalize implementation rules for the Dodd-Frank act’s provision on executive pay and corporate performance sometime between August and December.

Under the agency’s authority granted under the Dodd-Frank Act, the regulator’s commissioners voted 3-2 to enact a say-on-pay measure, making compensation plans subject to nonbinding shareholder votes as often as once a year.

The SEC amended the rule proposed in October 2010 to “specify that a say-on-pay vote is required at least once every three years, beginning with the first annual shareholders’ meeting taking place on or after January 21.” According to the SEC, companies also are required to hold a “frequency” vote at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. Furthermore, the ruling will improve disclosure on so-called golden parachute payments for executives, which they get when their companies are acquired by others in mergers.