Say on Pay

HR Policy Association in conjunction with the Center On Executive Compensation is opposed to non-binding shareholder votes on executive compensation – known as say on pay – as mandated by the Dodd-Frank Act because it believes the vote will continue to cause companies to adopt pay programs that are simply designed to win shareholder approval rather than those that are in the best long-term interests of the company.  The Center believes that ongoing dialog between a company and its shareholders is the best way to ensure that pay is aligned with the shareholder interests.  While say on pay has resulted in greater engagement between companies and large investors, it has also shifted a disproportionate amount of influence to proxy advisory firms whose proxy voting policies and analyses are likely to favor “cookie cutter” approaches to executive compensation that may not reflect the company’s best long-term interests.  This effect is particularly strong among smaller institutional investors who primarily rely on proxy advisory firm recommendations and collectively can have significant ownership in a company.  As a result, the Center believes say on pay may improperly influence boards of directors to make decisions that they may not have otherwise in order to secure a high say on pay vote.  Further, because say on pay votes typically take place annually, the Center believes there is a risk that compensation strategies that are best suited to unfold over the long term are at risk of being changed to look better in the short term at the cost of shareholder growth.  Companies can confront the various risks and offset the influence of proxy advisory firms at the largest investors by engaging in an ongoing dialog, but they do not have a similar opportunity with smaller investors, who often do not have the resources available for the same type of engagement.  In sum, despite the increase in engagement with large institutional investors as a result of say on pay, the Center believes that the negative aspects of the mandatory vote override the benefits.