Quick facts
- What it is: an advisory shareholder vote on executive compensation
- Rule: 17 CFR § 240.14a-21
- Statutory basis: 15 U.S.C. § 78n-1, added by the Dodd-Frank Act
- Frequency: at least once every three calendar years
- Binding: no
Say-on-pay is a shareholder vote on how a public company pays its senior executives. It has been required since 2011. It is advisory, which means the board can lose the vote and do nothing.
That combination, mandatory but non-binding, is the whole subject.
In plain English
Shareholders own the company but do not set executive pay. The compensation committee does. Say-on-pay was the compromise: shareholders get a formal, recorded, public opinion, and the board keeps the decision.
It is a vote of confidence rather than an instruction.
What the rule requires
Rule 14a-21(a) requires a covered company soliciting proxies for a meeting at which directors will be elected, and for which executive compensation disclosure is required under Item 402 of Regulation S-K, to "include a separate resolution subject to shareholder advisory vote to approve the compensation of its" executives.1
Two mechanics follow from that text.
It is a separate resolution. Compensation cannot be bundled with other business, so shareholders can reject the pay package while supporting everything else on the ballot.
It is tied to Item 402 disclosure. Item 402 governs disclosure of "all plan and non-plan compensation awarded to, earned by, or paid to the named executive officers."3 Shareholders are voting on what is in that disclosure: salary, bonus, stock and option awards, incentive compensation, pensions and perquisites for the named executives.
Frequency is itself a vote. The rule sets an outer limit, requiring the vote no later than the meeting "held in the third calendar year after the immediately preceding vote," and shareholders separately vote on whether it should happen every one, two or three years.1 Most companies hold it annually.
The word that defines it
The statute leaves no ambiguity about force. The shareholder vote "shall not be binding on the issuer or the board of directors of an issuer," and may not be construed as overruling a decision of the issuer or board, nor "to create or imply any change to the fiduciary duties" of either.2
That second clause is easy to skim past and worth stopping on. Congress specifically foreclosed the argument that losing a say-on-pay vote and then ignoring it is itself a breach of duty. The vote creates no new obligation.
So what does it actually do
It works through consequence rather than compulsion.
A failed vote is rare enough to be conspicuous. It draws press attention, features in the following year's campaigns against the compensation committee, and tends to produce a round of shareholder engagement followed by visible changes to the pay structure. Directors who ignore a clear result may find the next challenge aimed at their own re-election, which is a vote that does have effect.
The mechanism, in short, is embarrassment with a credible follow-up.
The related vote on deal payouts
A second advisory vote applies at the point of sale. When shareholders are asked to approve a merger or a disposition of substantially all assets, the company must include a separate advisory vote on the change-of-control compensation payable to executives.1 That is the golden parachute vote, and it is advisory for the same reason and to the same degree.
How to read the result
A pass in the nineties is unremarkable. The signal is in the tail:
- Below 70% is treated internally as a warning and usually triggers outreach.
- Below 50% is a failure, and the following year's proxy will normally explain what changed in response.
- A repeated failure is the one that matters, because it means engagement did not resolve the disagreement, and the argument moves from pay to the directors who set it.
What this means for a founder
You have no say-on-pay obligation, and you will not acquire one until an initial public offering is a real prospect. What transfers is the structural question the rule exists to answer: who decides what the executives are paid, and who can see it?
In your company that is the compensation committee if you have one, the board if you do not, and the protective provisions in your financing documents that may require investor consent for senior hires or compensation above a threshold. Your investors already have something stronger than an advisory vote. They have a consent right.
Find out which decisions it covers before you need to make one quickly.
Related reading
- Golden Parachute covers the change-of-control payouts subject to their own advisory vote
- Fiduciary Duty covers the duties the statute expressly declines to modify
- Majority Voting covers the director election vote that does have consequences
- Proxy Fight covers what follows when engagement fails