Say on pay: An Interview with Scott P. Spector
Nayla Rizk and Jonathan Visbal
January 2012
The Dodd-Frank Act required that shareholders get a regular — but nonbinding — vote on executive pay packages as well as "golden parachute" compensation arrangements.
In the 2011 proxy season, companies in Silicon Valley faced
little opposition to compensation packages and lost no “say-on-pay” votes. So, what impact is the new requirement having? Has it changed the way boards think about executive compensation or the pay packages they eventually award?
Scott P. Spector, a partner in the Fenwick & West Corporate
Group and chair of its Executive Compensation and Employee Benefits Group, talked with Spencer Stuart about how Silicon Valley boards and investors have responded to the say-on-pay requirements, the impact that the disclosure rules are having on executive pay, and the compensation issues that most concern investors.
Say-on-pay has been implemented by the SEC. How have boards viewed this generally? Are they concerned about it?
Scott P. Spector: As the first several months of these votes have taken place and people have seen that an overwhelming number of companies — almost all the companies —
have won support for their plans, boards have taken this very much in stride. At least in Silicon Valley, boards are not focused very much on say-on-pay. For a while, they were focused on the issue of say-on-pay frequency, and whether these votes should occur every three years or every year, and what the results would be if they recommended three years versus one year. People have gotten to the point where this is pro forma. That’s not to say it
won’t become an issue in the future. However, all of the companies that did lose say-on-pay votes have been sued, and, recently, one court let the suit withstand a motion to dismiss. This will get the attention of boards in 2012.
The U.K. has had what appears to be more stringent say-on-
pay requirements for quite some time, and companies have seen resistance to compensation plans. Do you think we’ll see more resistance over time, or is there a difference in philosophies between the U.K. and the U.S.?
There is no question that you’re going to see more than a
few dozen companies losing votes over the next few years. It’s also important to note that there have been a handful of companies that have put the say-on-parachute votes to a test because they’ve done M&A transactions since these rules became effective in April of this year. Those votes also are nonbinding, but have received greater opposition than the say-on-pay votes, so that may be an indicator of where this might be going.
But as we’ve seen in a variety of press reports, all this
disclosure that has been promulgated by Congress and the SEC over the past few years, in fact, has been an excuse to pay people more, not less. Some of that is because the data is available now and everybody sees what the lowest common denominator is. Everybody wants to be in that above-average category.
What do you think might affect executive pay going forward?
There have been some new compensation committee rules proposed, intended to increase the independence of compensation committees and advisers. I’m a pessimist on this. It’s cultural here at this point in time, so adding a layer of regulatory restrictions is not going to necessarily change the system. I do not think anybody has a good handle on how to change the culture.
You are seeing some practices changing. You’re not seeing
gross-ups anymore. You’re seeing more performance-based
arrangements. At the same time, because of the way companies are looking at performance-based bonuses, salaries are going up. You’re seeing stock grants getting bigger rather than smaller, and performance metrics that are put in place aren’t necessarily hard metrics or that difficult to achieve. There’s a hope that these independence rules will change that, because compensation
committees and consultants will have a little different focus; I’m not an optimist that compensation or process will change a lot.
The other thing that is happening related to compensation
is the way companies often approach new executive hires. When you finally target somebody who everyone thinks is the right candidate, there’s a rush to get this person signed up. They say, “We have to have this person and we don’t see any artificial line in negotiating the compensation. If it costs us more, it costs us
more. We’ve invested this amount of time. We’ve got to go for this.” That sends a message, and it is very difficult then to hold down compensation.
We’re seeing compensation committees look at different approaches to structuring compensation, for example, incenting longevity.
Compensation committees are trying. One of the impediments is that in order to do a really effective job, compensation committees and compensation committee chairmen need to spend more time focusing on the compensation issues that affect the company. That’s not being done as much as it should be. This is not easy. Unless you are willing to really spend time talking to the
CEO and the other members of the comp committee and experts off-line, it tends to look a little bit simpler than it really is. As a result, you don’t necessarily get the hard work being done to come up with the right answers to change the way compensation is structured.
The comp committee used to be one of the easier committees to be on, and audit was always the tough one. That may be changing. Are you seeing that?
You hit it exactly right. The comp committee was looked at as being simpler, and it didn’t require a lot of work outside the regular cycle of the meetings. It certainly didn’t require you to do a lot of homework before you got the slide material. But it’s actually harder. A lot of people like myself recommend that comp committees spend at least two meetings looking at a particular set of recommendations before they make a decision. You have to
have members who understand that.
What areas of compensation seem to be receiving closer
scrutiny from shareholders?
You don’t see gross-ups to cover excise taxes on golden
parachutes and perquisites any more, and they get negative
votes and negative reactions. Contracts that have automatic severance on a non-renewal is something that is problematic and gets a lot of attention. Having some kind of performance metric for either restricted stock or a bonus plan gets a lot of attention. Investors don’t go into the metrics, they just want to see performance metrics. Anything else doesn’t get a lot of attention.
Going back to your comment earlier that a lot of this is cultural, what role does communication to shareholders play in winning support for executive compensation plans? Can you win with an effective marketing campaign?
If you put aside say-on-pay, which has been relatively easy
for most Silicon Valley companies, from the most common and historical issue of getting equity plans approved, then marketing doesn’t help at all. Everybody has found that they have to work with Institutional Shareholder Services (ISS). A lot of investors do have their own policies, but they’re heavily influenced by ISS recommendations, and they will retain ISS consulting to help
them model a plan. Marketing campaigns are irrelevant. It’s just working with ISS to work within their system. By comparison, in some of the say-on-pay situations that initially received a negative recommendation from ISS, companies found it very effective to go out with a supplementary proxy mailing and make their case. ISS did not rebut those this year, but said that next year they will have
their own rebuttal.
This article is included in Silicon Valley Board Index 2011.
For information about copying, distributing and displaying this work, contact permissions@spencerstuart.com.