Companies face up to investors on say-on-pay

Proxy advisory firms have substantial influence on executive pay decision-making processes in US companies, however they have had little impact on the design of executive compensation programs, according to about half the respondents in a Towers Watson survey.

The Towers Watson”Executive Say-on-Pay Flash Survey”, conducted in June surveyed 251 US public and private corporations representing a cross section of industries, found only 12 per cent of respondents said they were very well prepared for the say-on-pay legislation, while 46 per cent said they were somewhat prepared, and just under a quarter (22 per cent) didn’t know if their companies were ready.

The financial reform legislation awaiting final action in the House and Senate includes a say-on-pay provision that would give shareholders of publicly traded US corporations a non-binding vote on executive pay.

Many companies indicated they were engaging with proxy advisors (44 per cent) to discuss areas of concern, meeting with key institutional shareholders (29 per cent) and preparing a formal communication plan (23 per cent).

“The influence of proxy advisory firms and institutional shareholders on executive compensation programs has increased steadily over the past few years and is likely to increase further in a say-on-pay world,” Andrew Goldstein, a leader in Towers Watson’s executive compensation business said. “As a result, we believe companies should be prepared for even closer scrutiny of their executive pay plans and policies, and will need to step up their communications with these groups through direct dialogue and even better proxy disclosure to be assured of strong support. Companies that fail to develop effective say-on-pay strategies and take steps now to make their compensation programs shareholder-friendly risk becoming lightning rods in this new environment.”

“Given the amount of work companies will need to do to adapt to life in a say-on-pay environment, it’s noteworthy that relatively few companies feel they are well prepared,” Goldstein said. “Companies understand that they’ll need to do more than simply describe their pay programs in their proxies and are beginning to take meaningful steps so that they are prepared.”

When asked what actions they were taking or planning in preparation for the say-on-pay legislation, nearly seven out of 10 said they were identifying potential executive pay issues and concerns in advance, while six in 10 said they were improving their compensation discussion and analysis to better explain the executive pay program’s rationale and appropriateness for the company.