The votes are in on 'say on pay' in 2011.

• Author: Ladd, Scott
• Position: EXECUTIVE COMPENSATION

Beginning this year, most public companies are required to submit named executive officer compensation to a non-binding shareholder vote--known as a "say-on-pay" (SOP) vote--every one to three years, as determined by the board, following a separate "say on frequency" vote.

This year's results have been much better than many companies expected. Through mid-July, shareholders returned negative SOP votes at only 37 companies (less than 1.5 percent of those holding SOP votes), mostly due to the level of executive pay relative to shareholder returns.

Although the SOP vote is non-binding, a negative vote has consequences. There is, of course, the investor relations impact. Companies also face litigation risk.

Through mid-July, lawsuits had been started against directors at six companies, and plaintiffs' firms announced investigations involving approximately 20 additional companies.

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In most cases--about 85 percent of the time--a negative recommendation from a proxy advisory firm was not dispositive. But the influence of these firms should not be discounted. Companies that received a favorable recommendation had much higher SOP approval percentages.

In 2011, companies with a positive SOP recommendation from Institutional Shareholder Services saw their resolution receive, on average, more than 90 percent support. Directors at these companies standing for re-election also received more votes in favor.

Many companies that received negative SOP recommendations in 2011 were unprepared to quickly ramp up their shareholder outreach to help ensure a...