The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 includes Section 951 requiring publicly traded companies to hold advisory “say-on-pay” proxy votes on executive compensation. Recently, the U.S. Securities and Exchange Commission officially adopted rules under Section 951 specifying that say-on-pay votes are required at least once every three years and that companies also are required to hold a so-called shareholder “frequency” vote at least once every six years to decide how often they would like say-on-pay votes.

Policymakers have repeatedly claimed that say-on-pay would give shareholders an invaluable voice on executive compensation. With the first wave of say-on-pay votes now behind us, what have shareholders said with this voice?

First-year proxy results | Equilar, a California-based executive compensation consulting company, analyzed the results of say-on-pay votes taken in the first six months of 2011 at the annual meetings of 2,252 firms, or 75 percent of those listed on the Russell 3000. As of June 30, 2011, only 1.7 percent (38) of those firms "failed" their say-on-pay vote, while 74.8 percent of the firms "passed" their say-on-pay vote with over 90 percent shareholder approval. Moreover, just 129 of the firms (5.7 percent) passed their say-on-pay vote with only a 50–70 percent approval rate, while 2,085 of the firms (92.6 percent) passed their say-on-pay vote with greater than a 70 percent approval.

Those are surprising numbers, since Institutional Shareholder Services (ISS), the largest advisement firm on proxy and shareholder issues in the United States, had recommended shareholder "nay" votes on say-on-pay for 293 firms (13 percent) through June 2011 — far higher than the 1.7 percent of firms whose shareholders voted down the compensation packages. This prompted Robert A. G. Monks, veteran corporate governance activist and founder of ISS, to say, "Say-on-Pay is at best a diversion and at worst a deception." Other commentators, citing the voting results, characterized say-on-pay as a "dud" or a "bust." However, it's an open question whether shareholders somehow "failed" in their voting, or whether the commentators simply have different opinions on executive pay than the shareholders.

CEO compensation and turnover trends | Why did shareholders approve so many compensation plans? Despite critics' claims that chief executive officers are paid ever higher compensation without regard to performance, recent research suggests that CEO pay in the United States has decreased over the last decade and is related to managerial performance. Steven Kaplan and Joshua Rauh, both of the University of Chicago Graduate School of Business and the National Bureau of Economic Research, found that in 2000, S&P 500 boards paid their CEOs an annual average of almost $17 million in compensation, including salary, bonus, restricted stock, and the expected value of options. In 2009, average CEO compensation was less than $8.5 million (in constant dollars), a decline of approximately 50 percent from 2000.

Dirk Jenter, of Stanford University and the NBER, and Katharina Lewellen, of Dartmouth University's Tuck School, in their recent study of CEO performance and turnover, found that 17 percent of chief executives with strong stock performance (in the top quintile) were removed from their position over a five-year period, while 59 percent of those with weak stock performance (in the bottom quintile) left office over that same five-year period — a stunning 42 percent differential in board decision-making accountability. The recent say-on-pay results, says Kaplan and Rauh, suggest that these shareholders agree with board assessments and employment decisions.

Conclusion | This first-year result of a 98.3 percent say-on-pay voting approval rate apparently reflects investors' overall satisfaction with the compensation packages that boards of directors recommended for their firms' CEOs. Of course, it would be premature to presume that the 2011 results are the final word on this issue. There is some indication that institutional investors will actively increase their involvement in say-on-pay voting during the 2012 proxy season. And the SEC is scheduled to adopt a rule under Section 953(a) of Dodd-Frank in the fall of 2011 to require U.S. public companies to disclose annually in their proxies the relationship between executive compensation paid and the company's financial performance. But for now, CEOs can breathe a sigh of relief, while executive pay critics have much to prove on behalf of their position.

Readings

  • "Investor 'Say on Pay' Is a Bust," by John Helyar. Bloomberg Businessweek, June 16, 2011.
  • "Performance-Induced CEO Turnover," by Dirk Jenter and Katharina Lewellen. Working paper, February 2010.
  • "Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?" by Steven N. Kaplan and Joshua Rauh. Review of Financial Studies, Vol. 23, No. 3 (March 2010).