Last proxy season 36 Russell 3000 companies lost shareholder advisory votes on executive compensation, also known as say-on-pay. Although only a small minority experienced failed votes, say-on-pay is having a significant effect on corporate pay practices.

Many companies are making changes to their compensation plans, especially those that garnered lukewarm support or lower from shareholders and those that saw proxy advisory firms recommend that shareholders vote against their plans. A new study from Towers Watson finds that of companies with less than 80 percent shareholder support and at least one negative vote recommendation, 71 percent plan to spend more time and effort next year to improve voting results next season. Meanwhile, 41 percent of companies who received at least one negative advisory firm recommendation say they plan to spend more effort in the next proxy season.

“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,” said Doug Friske, global head of Towers Watson's executive compensation consulting practice in a statement. Overall, 8 in 10 companies said say-on-pay had from a moderate to no impact on their focus for the 2011 proxy season and 3 in 4 companies plan to devout the same amount of effort on the topic next year.    

Even companies that received broad support made changes on their plans to get there. Among companies that received positive recommendations from advisory firms, many reached out to shareholders directly (56 percent), communicated with proxy advisers (53 percent), hired a proxy solicitor (40 percent) and made changes to their compensation structure (32 percent).

A majority of the respondents said plans for next year will include at least either a change in companies' pay determination processes or other preparations prior to the proxy season. In addition, 44 percent of the respondents plan to do more analysis on the relationship between pay and company performance. An equal number said their companies are already making program changes such as altering their severance provisions, perks, and change-in-control arrangements. Some say they will spend more time to prepare their compensation discussion and analysis in the proxy statement, and 17 percent plan to make changes to their compensation programs.     

It is important to reach out to shareholders and improve communication on how companies pay for performance, said Todd Manas, director at Towers Watson. He said the exercise is critical, since proxy advisory firms have their own measure, different from companies, in determining the link between executive pay and company performance. 

Other findings in the survey suggest 64 percent of employers are moderately concerned with the pending say-on-performance disclosure requirement, 20 percent of companies have already provided additional disclosure in the CD&A describing alignment between pay and performance metrics, and 57 percent think proxy advisory firms have little influence on pay program design. However, over half of the respondents think proxy advisers do have influence on say-on-pay results.

Another report, published by the Conference Board, recommended that companies engage in additional shareholder outreach prior to enforcing any changes to their compensation structure. Better dialogue with large shareholders is important to turn failed votes around next this year, it said in the report. The Conference Board says although majority of the companies were saved from negative votes this year, companies need to be mindful that the say-on-pay vote is a recurring requirement and ongoing focus on the process is required to ensure successful outcomes in the future.

The findings of the 2011 annual meeting report compiled by the Conference Board include:

Failed votes still remain small minority. Just 1.6% of the 2225 Russell 3000 companies who held say-on-pay votes failed to win them.

The industry or size of company were not influential in receiving negative votes

Although in most cases negative recommendations did not result in failed votes, the influence of proxy advisory services should not be discounted.

A truly successful vote requires more than bare majority.

Investor outreach strategies can influence outcome, and companies need to respond quickly to negative vote recommendations.