Say-on-pay rule: Study shows shareholder votes may not matter

How does your company’s executive compensation plan measure up? A recent study found that CEO compensation at large public companies has continued to increase despite the “say-on-pay” rule that went into effect in 2011. Here’s more information on this rule and key findings from the 2018 Equilar CEO Pay Trends report.

Soliciting feedback

Following the financial crisis of 2008, the Dodd-Frank Act required public companies to provide investors a “say on pay.” In January 2011, the SEC published Release No. 33-9178, Partner Approval of Executive Compensation and Golden Parachute Compensation. This rule, which went into effect in 2011, aims to curb excessive executive compensation by allowing shareholders to vote on executive compensation at least once every three years.

The votes aren’t binding, but they let boards know what shareholders think of executive compensation arrangements. Furthermore, the year following a say-on-pay vote, companies must disclose in proxy statements how they’ve responded to the most recent say-on-pay vote.

Analyzing the effects

Corporate research firm Equilar analyzed filings of the 500 largest companies in terms of revenue to determine the effect that the say-on-pay rule has had on CEO compensation. The study, which was published in February 2019, found that compensation has continued to rise during the eight years the rule has been in effect.

“Intuitively, it seems possible that CEO pay should decrease since it is under the scrutiny of a large number of shareholders. However, the data reveals a different story,” said Equilar.

Specifically, the study revealed that median CEO compensation after the rule went into effect was $9.5 million, while the median pay before Dodd-Frank was signed into law in 2010 was $6.6 million. The compensation research firm attributed the 43.9% increase in pay to the economic growth after the financial crisis.

However, the study also showed that, when a company fails its say-on-pay vote multiple times, it usually tries to align CEO compensation with industry standards. In fact, average CEO total compensation at companies that failed say-on-pay votes decreased 44.9% from 2011 to 2017.

The study highlights Bed, Bath & Beyond Inc. as an example of the “moderating effect” multiple say-on-pay failures can have over time. In 2014, Bed, Bath & Beyond failed its annual say-on-pay vote, but it increased the option and stock awards granted to its CEO for 2015. Not surprisingly, the company failed its say-on-pay vote again in 2015. In response to recurring shareholder disapproval, the company then decreased CEO compensation by 20.9% from 2014 to 2017.

“This shows that the [Bed, Bath & Beyond] made a concerted effort to gain approval in the eyes of its shareholders,” Equilar said.

Lessons learned

Equilar’s study concludes that the say-on-pay rule initially didn’t have a major influence on the pay amounts, but now that public companies have settled into the routine of receiving shareholder feedback on executive compensation arrangements, the rule is having a noticeable effect.

“Over time, compensation professionals realize the power of [say-on-pay votes] and take appropriate actions,” concludes the study. While say-on-pay votes may not have a direct influence, “the continuity of attention by shareholders and proxy advisors over the executive pay issue is an increasingly significant feature of the corporate governance and executive compensation landscape, and will likely continue to be so.”

© 2019