The SEC has recently passed new rules that pertain to shareholder votes on executive pay, including Say-on-Pay provisions and Golden Parachute votes. Learn about the purpose of these new rules for corporate governance and accountability and how these laws may potentially impact companies.
What Are Say-on-Pay and Golden Parachute Votes?
What Is Say-on-Pay?
The Say-on-Pay SEC provision requires that public companies give shareholders the opportunity to vote on executive compensation every three years or more. These companies must then disclose publicly how the Say-on-Pay vote impacted the compensation executives received. This disclosure is usually done in a proxy statement.
Shareholders also get the opportunity to weigh in on how often they would like to hold Say-on-Pay votes: every year, every other year, or the three-year minimum set out by the SEC.
During these votes, shareholders weigh in on compensation for the CEO, CFO and the next three highest-paid executives.
What Is a Golden Parachute?
Golden Parachute votes refer to special compensation packages for executives in the event of a merger and acquisition or a similar corporate transaction.
New SEC rules require that companies disclose to shareholders any existing agreements between the acquiring company and its target or between the acquiring company and any executives employed by the target company. Companies must disclose the total amount of all compensation that is due to be paid to executives and the specific conditions that trigger the Golden Parachute.
With both Say-on-Pay and Golden Parachutes, shareholder votes play an important role.
It may not be in the best interest of shareholders to offer excessive payments to executives.
Voting on the number of payments allows shareholders some measure of control. It also has the potential to hold companies to certain accountability standards.
SEC Rules on Say-on-Pay and Golden Parachute Votes
These provisions on Say-on-Pay and Golden Parachute advisory vote requirements were adopted in 2010 as part of the Dodd-Frank Act, a consumer protection act passed by Congress in response to the 2008 financial crisis. The Dodd-Frank Act outlines key provisions public companies must adhere to around executive pay, including:
- Allowance of shareholders to vote on executive compensation at least once every three years
- Certain disclosure requirements for executive compensation to meet accountability standards
- Disclosure of Golden Parachute arrangements, including payout terms and amounts
- Shareholder votes on Golden Parachute arrangements
The Purpose and Impact of These Votes
As mentioned above, a company's intended actions around executive compensation may not be in the best interest of shareholders. Allowing shareholders to weigh in promotes transparency and accountability. It can also encourage executives to act in the best interest of shareholders.
While Say-on-Pay votes are not binding, companies are required to disclose information about vote results in proxy statements. A company that chooses to ignore shareholder votes and reward executives with excessive pay packages can find itself subject to negative press.
Likewise, Golden Parachute arrangements that are disfavored by shareholders can create negative media attention for companies. Golden Parachute agreements are increasingly subject to public scrutiny when there are economic headwinds. If the economy heads toward a recession, shareholders could be increasingly eager to curb excessive executive pay and protect their interests.
Challenges and Criticisms of Say-on-Pay and Golden Parachute Votes
Both the SEC Say-on-Pay vote and the Golden Parachute votes are nonbinding. Regardless of their Say-on-Pay SEC filing, companies are not required to act in alignment with shareholders' stated interests. This has led to some criticism of the voting process as performative.
However, there are benefits to allowing shareholders to weigh in even when their preferences do not need to be taken into account.
Shareholder votes have an important advisory role. They can be used as a carrot or a stick to reward transparent behavior and good corporate governance or bring media attention to governance failures.
Shareholders have reason to be wary of Golden Parachute payouts. Frequently during an M&A, the company's stock dips after the merger when the payouts to executives are made. While companies hope the stock dip is temporary, investors have reason to be upset with large payouts, and to register their disapproval in a vote.
While there are compelling reasons to honor the wishes of shareholders when it comes to executive compensation, some companies choose to disregard what shareholders want and continue patterns of excessive compensation for C-suite officers.
Companies that have stuck by excessive pay for leaders despite shareholder preferences to rein in high costs include Aimia, First Majestic, Hecla Mining, Qualys and Cleveland Cliffs.
When well-known companies fail Say-on-Pay votes, the backlash can be powerful.
Consider Bed Bath & Beyond, which failed a Say-on-Pay vote in 2017 in response to a lackluster performance. The company trimmed executive pay by 19%. In 2018, Bed Bath & Beyond failed another Say-on-Pay vote, this time with even less shareholder approval for executive compensation packages. Five years later, the company filed for bankruptcy. Bed Bath & Beyond may be an extreme example, but it illustrates a point worth clarifying.
When shareholders vote against compensation packages, they do not merely wish to see less money offered to executives. They want a stronger plan from the company to improve its performance in the market. Companies that cannot deliver on this are unlikely to fare well, even if they don't ultimately face liquidation.
How Companies Can Prepare for Say-on-Pay and Golden Parachute Votes
Executive compensation can be complex. Not every investor has the background to understand the topic or make an informed decision.
Most of the time, shareholders agree with the suggested compensation packages. Thus, it is unlikely that a company would fail to win the vote even if some shareholders were not properly grounded in the reasoning behind the executive pay levels proposed by the company.
Even if the vote is likely to support the proposed strategy, preparing ahead of time can increase shareholder goodwill. Preparation starts with clear, transparent communication with shareholders. When shareholders understand the type of executive compensation package and the reason for it, they are less likely to react with suspicion or anger.
Distributing an understandable compensation disclosure ahead of time helps shareholders understand the plan and perhaps get on board. Educating shareholders helps to clear up misconceptions that could lead individuals to vote against pay packages. Not only does this help companies to get a stronger vote of confidence from shareholders, but also it is good for governance.
With shareholder communications and engagement, companies should focus on explaining issues around corporate governance, answering questions and connecting the dots between compensation and key performance indicators.
Companies must adhere to Say-on-Pay and Golden Parachute policies for reasons associated with transparency and good corporate governance. For example, SEC guidance Say-on-Pay was developed to protect shareholder interests and promote transparency.
Companies that invest in education and outreach to shareholders are likely to increase confidence ahead of the vote.
In addition to preparing for this important work, companies need proxy statement solutions so they can file necessary paperwork with the SEC, demonstrating compliance with SEC rules. DFIN offers SEC filing software with enhanced security features, designed to help companies prepare and send financial reports quickly and efficiently, so they can spend more time innovating. Discover why industry-leading companies trust DFIN for their financial reports.
