Early Proxy Filers Lean Toward Triennial Say-on-Pay

Now that the Dodd-Frank Act forces companies to give shareholders a say on executive pay, the next question they need to answer is how often those advisory votes will occur.

That question of frequency has set off a small battle between some companies that want to limit say-on-pay votes to every three years and shareholder groups who want the votes annually. Early proxy filings indicate that at least some companies are bucking the trend of recommending advisory say-on-pay votes every year, and instead are asking shareholders to vote for triennial votes.

Among 17 proxy filings that included say-on-frequency votes filed from November through early December, 10 companies recommended advisory votes on compensation every three years, while five recommended annual votes, according to data tracked by executive compensation research firm Equilar. One company filed a proxy recommending a say-on-pay vote every two years and another made no recommendation.

Since the vast majority of companies follow a calendar-year end and won't file their proxies until March, those who watch such filings say it's too soon to tell what direction most companies will go. Some expect the final tally to look proportionate to the early filings, with the majority of issuers recommending triennial votes.

“Most companies are choosing between triennial and annual votes,” says Martin Rosenbaum, a partner with Maslon Edelman Borman & Brand. “I think as the proxy season progresses, more companies may lean toward triennial votes.” Seeing early filers go that route could embolden others still on the fence to follow suit, he says.

In fact, early filers could have a big effect on what most companies end up deciding, since nobody wants to be an outlier. “A lot of people are waiting to see the early returns,” says Stephen Quinlivan, a shareholder in the law firm Leonard, Street & Deinard.

If the triennial vote does become popular, it would fly in the face of a recommendation by Institutional Shareholder Services to hold a say-on-pay vote every year. Some governance experts, however, believe the early trend isn't indicative of what will happen during proxy season. “I suspect most companies will be swayed by ISS and by institutional investors who are strongly recommending that companies hold annual votes,” says Peter Fetzer, a partner at Foley & Lardner. Companies may opt to take an annual approach to avoid risking future shareholder campaigns against their compensation committee members. In addition, Fetzer and others say some companies take the view that an annual vote is preferable because it will become routine.

Which option a company's board recommends will ultimately depend on numerous factors, including the makeup of the shareholder base, input from the largest shareholders, past shareholder proposals on say-on-pay, and the company's executive compensation history.

For instance, companies that previously received shareholder proposals seeking annual votes might be more inclined to go that route. “If they've gotten a shareholder proposal seeking say-on-pay in the past, companies should recommend [a frequency] in line with the proposal, unless they have a really good reason not to,” Fetzer says.

Meanwhile, companies that have already adopted say-on-pay votes voluntarily may be inclined to stick with the model they have already chosen. (A few dozen companies—including Aflac, Intel, and Occidental Petroleum—made the switch on their own prior to passage of the Dodd-Frank Act earlier this summer.) Most of those adopted annual votes. “More often than not, I'd expect the companies that have already battled with their institutional investors on this issue to stick with what they're already doing,” Rosenbaum says.

“I suspect most companies will be swayed by ISS and by institutional investors who are strongly recommending that companies hold annual votes.”

—Peter Fetzer,

Partner,

Foley & Lardner

Proxy watchers expect few to follow the approach taken by Tyco Electronics, the only company so far that has opted not to make any recommendation at all on the frequency of the say-on-pay vote. The company's Dec. 3 preliminary proxy filing says its board didn't make a recommendation “because it has decided to consider the views of the company's shareholders before making a determination.”

But most boards will want to use the opportunity to make a recommendation, Fetzer says. “It makes sense to explain as a part of the company's compensation story what it views as a proper frequency for the vote,” he says. The exception might be a board that suspects its recommendation might not be successful, Rosenbaum adds.

Quinlivan offers another reason companies might not want to dodge making a recommendation on frequency: Without one, any signed but undesignated proxy cards and electronic votes cast in favor of the board's recommendation won't be voted on the frequency proposal. 

Triennial Thinking

WHAT'S THE FREQUENCY?

What follows are some company examples of frequency proposals from Equilar, Inc.:

Company Name: Beazer HomesFiling Type: PRE 14AFiling Date: 12/02/10Frequency: AnnualDisclosure Text: Under the Dodd-Frank Act, the Company also is required to seek a non-binding advisory stockholder vote regarding the frequency of submission to stockholders of a “Say on Pay” advisory vote such as Proposal 3. The Dodd-Frank Act specifies that stockholders be given the opportunity to vote on our executive compensation programs either annually, every two years or every three years. Although this vote is advisory and non-binding, our Board of Directors will review voting results and give serious consideration to the outcome of such voting.

Our Board of Directors recognizes the importance of receiving regular input from our stockholders on important issues such as our compensation programs. Our Board of Directors also believes that a well-structured compensation program should include plans that drive creation of stockholder value over the long-term and do not simply focus on short-term gains. While we believe that many of our stockholders think that the effectiveness of such plans cannot be adequately evaluated on an annual basis, especially in a cyclical industry such as ours, the Board of Directors believes that at present it should receive advisory input from our stockholders each year. Accordingly, as indicated below, the Board of Directors recommends that you vote in favor of an annual advisory vote on our compensation programs.

Company Name: Hormel FoodsFiling Type: PRE 14AFiling Date: 12/10/10Frequency: BiannualDisclosure Text: The advisory vote on the frequency of the say-on-pay vote is a non-binding vote as to how often the say-on-pay vote should occur: every year, every two years, or every three years. In addition, stockholders may abstain from voting. The Dodd-Frank Act requires the Company to hold the advisory vote on the frequency of the say-on-pay vote at least once every six years.

The Board of Directors believes a biennial frequency (i.e., every two years) is the optimal frequency for the say-on-pay vote. A say-on-pay vote every two years strikes the right balance between having the vote too frequently with an annual vote and being less responsive to stockholders with a vote every third year. A vote every two years provides stockholders and advisory firms the opportunity to evaluate the Company's compensation program on a more thorough, longer-term basis than an annual vote.

The Board believes an annual say-on-pay vote would not allow for changes to the Company's compensation program to be in place long enough to evaluate whether the changes were effective. For example, if the say-on-pay vote in January 2011 led to changes to the compensation program being made in November 2011, at the beginning of the next fiscal year, those changes would be in place only a few months before the next annual say-on-pay vote would take place in January 2012. For a related example, even if changes were made to the compensation program shortly after a say-on-pay vote in January 2011, those changes would be in place only for the last half of fiscal 2011 and the first few months of fiscal 2012 before the next annual say-on-pay vote would take place in January 2012.

Conversely, waiting for a say-on-pay vote once every three years may allow an unpopular pay practice to continue too long without timely feedback. A say-on-pay vote every two years is also sensitive to stockholders who have interests in many companies and may not be able to devote sufficient time to an annual review of pay practices for all of their holdings.

Company Name: Johnson ControlsFiling Type: PRE 14AFiling Date: 11/19/10Frequency: TriennialDisclosure Text: The Company would also like to seek your input with regard to the frequency of future shareholder advisory votes on our executive compensation programs. In particular, we are asking whether the advisory vote should occur every three years, every two years or every year. The Company asks that you support a frequency period of every three years (a triennial vote) for future non-binding shareholder votes on compensation of our named executive officers.

A shareholder advisory vote on executive compensation is very important to the Company. We appreciate the past approval of our incentive pay programs by our shareholders, which have historically occurred every five years. This has served both our company and our shareholders well, ensuring a direct alignment between executive compensation and financial performance results. Setting a three year period for holding this shareholder vote will enhance shareholder communication by providing a clear, simple means for the Company to obtain information on investor sentiment about our executive compensation philosophy. An advisory vote every three years will be the most effective timeframe for the Company to respond to shareholders' feedback and provide the Company with sufficient time to engage with shareholders to understand and respond to the vote results. The Company also believes a triennial vote would align more closely with the multi-year performance measurement cycle the Company uses to reward long-term performance. Our executive compensation programs are based on our long-term business strategy, which is more appropriately reflected with a three-year timeframe.

Source

Equilar, Inc.

Companies recommending a vote every three years, including Emerson Electric, Monsanto, and Johnson Controls, reasoned that a triennial vote aligns better with the cycles they use to measure performance for long-term compensation, and gives the company time to respond to shareholder sentiments.

For example, Emerson awards performance shares every three years, with the payout based on a four-year performance period. Those awards represent 45 to 55 percent of the total compensation, and 70 to 80 percent of the long-term compensation for named executive officers. Stock options are also generally awarded every three years. In addition, Emerson said a three-year cycle gives the board sufficient time to consider the results and implement any desired changes to its compensation policies and procedures, and provides investors sufficient time to evaluate the effectiveness of short- and long-term compensation strategies. 

Likewise, Monsanto said a triennial vote will allow shareowners to better judge its executive compensation program in relation to its long-term performance.

“We grant awards with multi-year performance and service periods to encourage our proxy officers to focus on long-term performance, and recommend a triennial vote which would allow our executive compensation programs to be evaluated over a similar time-frame and in relation to our long-term performance,” Monsanto's proxy states. “A triennial vote is an appropriate frequency to provide our people and compensation committee sufficient time to thoughtfully consider shareowners' input and to implement any appropriate changes to our executive compensation program, in light of the timing that would be required to implement any decisions related to such changes.”

Annual

Other companies, such as Visa, say an annual advisory vote will allow stockholders to provide direct input on the company's compensation philosophy, policies, and practices as disclosed in the proxy statement every year. “An annual advisory vote … is consistent with our policy of seeking input from, and engaging in discussions with, our stockholders on corporate governance matters and our executive compensation philosophy, policies, and practices,” Visa's proxy states.

In addition to the usual explanation that the vote is advisory and not binding on the board, Visa further noted that its board “may decide that it is in the best interests of our stockholders and Visa to hold an advisory vote on executive compensation more or less frequently than the option approved by our stockholders.”

Biennial

Hormel Foods, the only company so far to recommend a biennial say-on-pay vote, says that frequency “strikes the right balance between having the vote too frequently with an annual vote and being less responsive to stockholders with a vote every third year.”

“A vote every two years provides stockholders and advisory firms the opportunity to evaluate the company's compensation program on a more thorough, longer-term basis than an annual vote,” the company's proxy states.

Companies will also want to keep an eye on the outcomes of early frequency votes, which start in late January.