Corporate boards now have a year under their belts of shareholders issuing nonbinding say-on-pay votes on executive-compensation plans, but the grumbling continues unabated.
Say on pay, mandated under the Dodd-Frank financial-reform law, was intended in part to help companies better manage the compensation of their key executives. But among 101 public-company board members interviewed by accounting and consulting firm BDO, 78% said they saw no such benefit. Directors who serve on compensation committees were even more likely (91%) to feel that way.
“This survey echoed things we’ve been seeing with our own clients,” says Randy Ramirez, a senior director on compensation in BDO’s corporate governance practice. “Board members are still planning compensation programs in line with what the business is trying to achieve.”
If anything, Ramirez notes, Dodd-Frank is actually hindering compensation planning. Although their pay practices haven’t changed wholesale, board members are mindful of the new pressures that say on pay has brought and are spending extra time structuring executive-pay packages in a way that will prove objectionable to fewer shareholders. (Even if a compensation plan won approval this year, a sizable minority of “no” votes may have left a taint on a company, which may be motivated to make changes for next year.)
“There is an inordinate amount of time, much more than usual, [being spent] on compensation planning,” says Ramirez, who sees some of it as time wasted, because a lot of what goes into the pay decisions are things shareholders and the public are not privy to. Seventy-one percent of survey respondents said they do not want to spend more time on executive compensation.
Indeed, board members are skeptical that shareholders have any objective, informed opinions on executive pay, judging by another survey result. More than four in five (81%) of respondents indicated their belief that shareholder criticism of executive compensation frequently suffers from 20/20 hindsight. If a company does well during a year, shareholders are likely to approve even out-of-proportion pay packages. If the company does poorly, executive pay comes under unreasonably excessive scrutiny.
A key to that problem is that say-on-pay votes are annual, whereas company goals may be spread over several years. “Businesses would benefit from a long-term approach,” says Ramirez. “When you’re talking about big companies and steering a ship like that, results don’t manifest themselves over a 12-month period.” Shareholders don’t necessarily look at prior years’ performance, or take into account that the most recent year was one of high investment levels, not to mention confidential, proprietary information about the company’s future strategy.