Say on Pay is currently the largest driver of change in the world of executive compensation. This provision of the Dodd-Frank Act was the talk of the media and consulting firms during the 2011 proxy season. And it will certainly be a major force as we prepare for the 2012 proxy season. This focus is interesting since shareholders overwhelmingly supported executive say on pay proposals this past year. The majority of pay programs received an average of more than 90% support, and less than 2% of companies had their proposals voted down by shareholders. It would appear that all the fuss about executive compensation was much ado about (almost) nothing. Another view is that compensation professionals and their advisors took the new rule seriously and many modified their programs prior to the voting season to reduce shareholder concerns. This is exactly how a rule should work.
If there is a new rule that bans smoking in restaurants, you should expect to not see smoking in those establishments once the rule goes into effect. The lack of smoking is not evidence that there was no prior problem. In fact, it could be argued that restaurants needing to ask a few people to stop smoking after the ban is in place, is proof that the ban had a purpose and is effective.
Prior to the rule, most people did not smoke. For them the change was almost universally positive. They had to do little to prepare and the result was a more pleasant and healthy meal. For others it was an inconvenience, but one that could be handled with a little forethought. For a very small group the concept of not smoking just didn't fit into their world view.
Say on Pay is similar to this. The less than 50 companies who received “no” votes on their compensation programs are generally examples of not fully understanding the impact of the new rules. Most will make a few changes prior to the 2012 proxy season and receive positive votes. A tiny percentage will continue to insist that they cannot exist unless their executive compensation is unpalatable to the rest of the world.
So, Say on Pay will give shareholders a voice and may give rise to new paradigms in compensation. The issue is, of course, whether this is a creeping vine of regulation. Smoking bans started because of health concerns. They now expand to outdoor spaces, like Central Park in New York City, mostly on the grounds of annoyance, nuisance and littering. While these are all legitimate concerns, they create an environment that may unfairly restrict people living within the law, but outside of the majority thought patterns. Cigarettes are legal, but smoking them is increasingly becoming illegal.
Consider a world where accounting, tax rules and individual corporate strategy all promote the use of stock options or deferred compensation, but outside influences make the use of these tools a litmus test for getting a positive vote.
We should take care that compensation programs do not fall victim to a similar silently growing list of restrictions. We must be willing to admit that there were legitimate reasons for Say on Pay, and that we have structured programs to better deal with those issues. This will allow us to keep the focus on the facts, and stop a devolution into new restrictions that may be driven by simple annoyance, personal opinion or whims of the day.