What to make of say on pay? By taking several steps, starting with an alignment analysis, you can make it a nonevent.

• Author: Ferracone, Robin A.
• Position: COMPENSATION AT WORK

JUST LIKE death and taxes, it was a virtual certainty that public companies were going to have to subject their executive compensation arrangements to a nonbinding vote by shareholders. Now, with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) on July 21, 2010, it is an absolute certainty. This so-called say on pay provision of the law will pertain to proxies and business transaction prospectuses for annual or special shareholder meetings that will take place on or after January 21, 2011.

It is unrealistic to think that shareholders will have the resources to take a deep dive into the pay programs of the companies in which they have invested. Instead, they will more likely have to rely on the company or on shareholder advisory groups to make a convincing case one way or the other.

At this point, approximately 75 companies have voluntarily adopted say on pay, including such household names as Hewlett-Packard, Microsoft, General Mills, Avery Dennison, and Pepsico. Our firm, Farient Advisors, estimates that approximately 20% of large companies have now either voluntarily or involuntarily adopted say on pay. For most of these companies, the vast majority of their shareholders have voted affirmatively for the executive pay arrangements.

However, for a few companies, most notably Motorola, Occidental Petroleum, KeyCorp, and Abercrombie & Fitch, the majority of investors voted "no" on the pay programs. And for others, like Wells Fargo, a significant minority voted "no," which is hardly a vote of confidence. Those firms with a significant percentage of "no" votes will be persuaded to consider reforms in their executive compensation programs and practices.

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When investors say "no" to pay, they do so for three primary reasons. The first is that they view executive pay as being too high; the second related reason is that they do not see the company demanding sufficiently high performance in return for the high pay; and the third is that they do not think that the pay programs and decisions are transparent enough, which implies that they do not trust that the board will make decisions on executive pay that are in their best interests.

The questions then for boards (and their compensation committees) are: (1) how can companies ensure that there is proper alignment between performance and pay; and (2) how can they demonstrate, in a clear, concise, and transparent way, that good...