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How Has Say on Pay Affected Executive Compensation?

As expected, say on pay votes over the past couple of years has not led to a big swing change in how companies compensate their top executives. However, it has shifted the conversations between investors, directors, and those who make the big bucks at companies.

"It certainly has done something, and the something it's done has been it's changed the dialogue between shareholders and the company," Hillary Sale, a law professor at Washington University in St. Louis, recently told the Minneapolis Star Tribune.

In other words, businesses are having to listen their investors more – a turnabout that was part of the reason Congress pushed for the nonbinding votes when passing the Dodd-Frank Act in 2010. This proxy season was the first time all companies were subject to the provision, as smaller publicly traded businesses – those with a public float less than $75 million – joined the fray of having their investors weigh in on whether their most highly compensated execs are paid too much.

For the most part, companies have not had to worry about the bad publicity that accompany negative votes. It’s rare that the majority of investors go against the pay packages of any one company, unless a business has had a significantly bad year.

Instead, what has occurred is directors’ performance rather than exec pay are more on the line, according to Sale.  "The impact on boards is actually more significant than the impact on pay itself, at least so far," she said. "If they get a bad pay vote, next year's vote will be one targeting them."

As of late July, there have been 2,238 say-on-pay votes so far in 2013. A recent report from executive-pay tracker Equilar revealed 91 percent of participating companies have received 70 percent shareholder approval or higher, and only 59 businesses have had shareholders reject compensation packages.

Low Approval Rates Are a Cause for Change
Mutual funds, pension funds, and insurance companies are usually brought in to the conversation when less than three-quarters of investors approve the current compensation structure at a business. Take Target, for example: After seeing high success rates in 2011 and 2012, shareholders approved the retailer's executive compensation policies with only 52.1 percent of the vote this year.

"Anything under 70 percent is really bad," Sale told the newspaper. "You've got to be on this constantly, you have to be in touch with your institutional shareholders, and you can't just do it around the annual meeting."

When shareholders give lower-than-anticipated approval rates, companies have a few tools at their disposal. Brian Cumberland, national managing director of the compensation and benefits practice of Alvarez & Marsal Taxand, said putting in place a pay-for-performance measure, forming a shareholder outreach program, or hiring a compensation consultant have been a few methods companies have used to ensure compensation approval.

Execs at Larger Companies More Likely to Get the OK on Pay
Small-business owners who bring their entrepreneurial ideas into the publicly traded space are not getting the love by shareholders when their pay is up for approval, at least according to a recent article for the Dealbook section of The New York Times. Rather, executives at larger corporations have their compensation packages approved more often than owners of small firms.

More often than not, C-suite members at today's organizations are "largely caretakers of already established institutions," said the newspaper, who have simply taken the reins at already profitable firms.
While say on pay was created to discourage members of the C-suite from overpaying themselves and to build a form of corporate governance where boards of directors could police executives from awarding themselves with disproportionately high wages, those efforts have proved ineffective in the view of some observers.

Dealbook reported on an Equilar analysis that revealed company higher-ups saw their compensation grow 24 percent in 2010, 6 percent in 2011, and another 6.5 percent in 2012. Shareholders for the most part have looked the other way as – depending on one’s viewpoint – income inequality in this country continues to grow. Any shift predicted when say on pay passed three years ago has not occurred.