Communications key for managing 'say-on-pay' impacts.
Author | Delves, Donald |
The new federal requirement for public companies to hold non-binding shareholder votes on executive compensation plans (known as "say on pay") will create different challenges for corporate professionals in different roles, including financial and human resources executives.
As image damage from "no" votes could be severe in today's turbulent corporate governance environment, companies must become far more proactive in explaining how their top executives are paid. Say on pay, a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that becomes effective next year, will have the effect of forcing public corporations to open kimonos that have long been cinched tight--even by companies with relatively transparent disclosure practices.
Professionals from various departments will have to put their provincial interests aside and come together to formulate and present unified, universal messages about how their compensation plans ultimately create shareholder value. This will mean modifying the legalistic approach of limiting the content of discussions to that required by the U.S. Securities and Exchange Commission in proxy statement disclosures.
Though this change won't come easily, many companies will ultimately view it as beneficial. For those who use say on pay as an opportunity to engage in ongoing dialogue about reaching corporate goals through responsible compensation practices, it may lead to stronger links between pay and performance.
This fortified linkage results from increases in accountability catalyzed by exposure. By shining more light on the pay-setting process, the Dodd-Frank Act may spur companies to improve their compensation programs so that they have a better pre-vote picture to present to shareholders.
By clearly communicating the rationales underlying executive incentives, companies can demonstrate transparency as well as accountability. These are core governance principles that support sound pay decisions.
Successful shareholder relations in the say-on-pay era will require companies to present pay plans in the context of governance principles. In addition to transparency and accountability, these principles include alignment of executives' financial interests with those of shareholders and engagement of executives and other employees in the pursuit of corporate strategy and the creation of long-term value.
These and other principles can provide a framework and language to help management and boards...
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