Say-on-Pay
Quick Facts
- Requirement: Mandatory for US public companies (Dodd-Frank, 2011)
- Vote type: Advisory (non-binding)
- Frequency: Annual for most companies (some biennial/triennial)
- Approval rate: ~90% of companies receive majority support
Say-on-pay is a shareholder vote on executive compensation—typically an advisory (non-binding) vote on whether shareholders approve of the compensation paid to the company's named executive officers. Required by the Dodd-Frank Act since 2011, it gives shareholders a voice on pay without directly overriding board decisions.
In Plain English
Say-on-pay lets shareholders vote on whether they think executives are paid fairly. It's advisory—even if shareholders vote "no," the company doesn't legally have to change anything. But a failed say-on-pay vote is embarrassing, attracts negative attention, and usually forces the board to respond.
How Say-on-Pay Works
The Annual Vote
- Proxy statement: Company discloses executive compensation
- Recommendation: Board recommends "for" vote
- Advisory firms: ISS and Glass Lewis issue recommendations
- Shareholder vote: Advisory vote at annual meeting
- Results disclosed: Pass/fail announced
- Company response: If failed, engagement and changes expected
What Shareholders Vote On
The vote covers the Summary Compensation Table for "Named Executive Officers" (NEOs):
- CEO
- CFO
- Three other highest-paid executives
This includes:
- Base salary
- Bonuses
- Stock awards
- Option awards
- Non-equity incentive compensation
- Retirement benefits
- Perquisites
Advisory vs. Binding
| Characteristic | Advisory (Say-on-Pay) | Binding Vote |
|---|---|---|
| Effect | Non-binding | Legally enforceable |
| Board discretion | Full discretion remains | Must comply |
| Failure consequences | Reputational | Legal |
| Prevalence | Standard in US | Rare for comp matters |
Companies can—and often do—ignore failed advisory votes. But most don't want the negative attention.
Frequency Vote (Say-on-Frequency)
Shareholders also vote on how often say-on-pay votes occur:
- Annual (most common, ~90% of companies)
- Biennial (every two years)
- Triennial (every three years)
The frequency vote itself happens every 6 years.
When Say-on-Pay Fails
Failure Rate
- ~10% of companies fail to get majority support
- Higher failure rates at companies with:
- Poor stock performance + high pay
- Controversial pay practices
- ISS/Glass Lewis opposition
Consequences of Failure
Immediate:
- Negative press coverage
- Institutional investor pressure
- ISS/Glass Lewis scrutiny in future years
Common Responses:
- Board engages with major shareholders
- Compensation committee reviews practices
- Changes to pay structure (more performance-based)
- Enhanced disclosure and rationale
- Sometimes: CEO/CFO pay reductions
Legal Effect:
- None directly—vote is advisory
- But persistent failures may trigger governance concerns
What Drives Voting Outcomes
ISS/Glass Lewis Recommendations
Proxy advisory firms are enormously influential:
- ISS "Against" recommendation = 25-30% voting swing
- Most institutional investors follow ISS/Glass Lewis
- Companies actively engage with advisors pre-vote
Key Factors Advisors Consider
| Factor | How It Affects Vote |
|---|---|
| Pay-for-performance alignment | Disconnect = negative |
| Peer group comparison | Above-median = scrutiny |
| Stock performance vs. pay | Underperformance + high pay = trouble |
| Problematic pay practices | Tax gross-ups, guaranteed bonuses = negative |
| Responsiveness | Ignoring prior low votes = negative |
"Say-on-Golden-Parachutes"
Related Dodd-Frank requirement:
- Separate vote on executive change-of-control payments
- Disclosed in merger proxy statements
- Also advisory
- Often fails when packages seem excessive
Criticism of Say-on-Pay
Too Weak?
- Advisory only—boards can ignore results
- Most votes pass anyway (~90% approval)
- Doesn't address structural issues in CEO pay
Too Disruptive?
- Shareholder competence questioned
- Proxy advisors have outsized influence
- Short-term focus vs. long-term incentives
Mixed Results?
- Studies show modest impact on pay levels
- More impact on pay structure (more performance-based)
- Increased board-shareholder dialogue
International Comparison
| Jurisdiction | Say-on-Pay | Binding? |
|---|---|---|
| United States | Required | Advisory |
| United Kingdom | Required | Binding (on policy) |
| Australia | Required | Two-strike rule |
| Germany | Required | Advisory |
| France | Required | Binding (some) |
UK and Australia have stronger versions—UK policy votes are binding, and Australia's "two-strike" rule can trigger board spill.
Best Practices for Companies
To avoid failure:
- Strong pay-for-performance alignment
- Clear disclosure and rationale
- Proactive shareholder engagement
- Eliminate problematic practices (tax gross-ups, etc.)
- Reasonable peer group comparisons
If failure occurs:
- Engage shareholders immediately
- Disclose what you learned
- Make meaningful changes
- Explain responsiveness in next proxy
Practical Takeaways
For shareholders: Say-on-pay is your tool to voice concerns about executive compensation. While advisory, failed votes create real pressure for change. Pay attention to ISS/Glass Lewis recommendations for analysis.
For boards: Take say-on-pay seriously even though it's advisory. A failed vote signals governance problems and attracts scrutiny. Proactive engagement is better than reactive damage control.
Related Reading
- Golden Parachute — Change-of-control pay (related "say-on" vote)
- Fiduciary Duty — Directors' compensation decisions
- Proxy Fight — When compensation becomes a campaign issue