The 2010 Dodd-Frank Act requires publicly traded US corporations to hold advisory shareholder votes on pay packages for top-level executives every one, two, or three years, and to ask shareholders how often they would like to hold those votes every six years. Stephen Miller at SHRM highlights an analysis of 2017 proxy season voting showing that investors are increasingly requesting to hold these votes annually:
A switch to annual voting on compensation was supported by institutional investors that are part of a say-on-pay investor working group coordinated by Segal Marco Advisors. The investor group found that 319 Russell 3000 firms limited the say-on-pay vote to once every three years. Of the 319 firms with triennial voting contacted by the investor working group last October:
- 46 of them did not have a say-on-pay frequency vote this year because either they underwent a change in control or the vote will happen at a future meeting.
- Shareholders at the remaining 273 companies favored an annual vote.
The votes mandated by Dodd-Frank are non-binding, so companies are not obligated to abide by investors’ wishes about executive pay packages or how often to hold these votes, but they do put pressure on boards of directors to make changes. Of the 273 companies with triennial voting where shareholders favored an annual say-on-pay vote, 146 (53 percent) switched to an annual vote as a result, including some household names like Amazon, Comcast, and Lululemon.
These findings reflect an ongoing trend of increasing investor activism, with institutional investors in particular looking more closely at companies’ management practices and being more vocal about calling for change. At CEB, now Gartner, our Investor Talent Monitor (which CEB Corporate Leadership Council members can read in full here) shows that organizational culture, recruiting strategies, and other talent issues are coming up with greater frequency on investor calls.
Shareholders are also shaping the conversation around executive compensation, demanding more transparency from companies about how they set pay for their C-suite executives as well as greater input. Institutional investors have urged the Securities and Exchange Commission not to delay a rule created by the Dodd-Frank Act that that would require public companies to disclose the ratio between the compensation of the CEO and the median annual compensation of every other employee in their proxy statements, starting with the 2017 fiscal year. That rule now looks likely to go into effect on schedule.
Other countries have taken different regulatory approaches to giving investors more power to rein in out-of-control executive pay. Australia, for instance, adopted a “two strikes” rule in 2001, which stipulates that if at least 25 percent of a company’s investors vote against approving its remuneration report at two consecutive annual shareholder meetings, that automatically triggers a vote on whether to force the entire board, except the managing director, to stand for re-election within 90 days. That rule appears to have had an impact on CEO compensation, with new chief executives at some major Australian companies agreeing to pay packages that are significantly less generous than those of their predecessors.