A Plea for a Better Response to a Failed Say on Pay Vote

The 2010 Dodd-Frank Act provided shareholders of U.S. public corporations the right to vote on chief executive officers’ compensation, at least every three years. The so–called say on pay vote is advisory but was designed to curb overly generous executive pay packages.

Since 2011, the financial press, consultants and academic scholars have considered how shareholders make use of this right. According to the latest results of Semler Brossy[1], 93 percent of the Russell 3000 companies received say on pay support of more than 70% in 2016, and the failure rate dropped to 1.7 percent, the lowest level since 2011. Meanwhile, academic studies suggest that American companies are not cutting back on executive pay in this say on pay era.

They are, however, paying attention to say on pay votes, typically restructuring compensation packages of executives in the years the votes occur. [2] Also, the likelihood of being dismissed as a CEO has increased since say on pay was adopted, and average CEO compensation has increased as a result.[3] In my study[4], I look at whether advisory say on pay votes can reduce generous executive pay and how the mechanism could be improved.

To date, little is known about how non-U.S. companies react to failed say on pay votes and whether they adjust their executive remuneration packages. For comparative reasons, we turned to Europe to study this feature of corporate executive compensation behavior. In an earlier post on Columbia’s Blue Sky Blog[5], Vanderbilt Law School Professor Randall Thomas and I reported that the UK and Belgium, representing a common law and a civil law country, respectively, both introduced a similar, mandatory but advisory vote for the remuneration report.[6]

As in the U.S., the average opposition rate for say on pay is higher than for other voting items and ranges every year between 5 percent and 10 percent of the total votes both in the UK and in Belgium. In both countries a handful of companies — relatively even fewer than in the US — failed the remuneration report vote. We can also confirm that lowering the absolute amounts of remuneration is not a key feature of the adjustment measures, if any, companies are considering after a failed vote. The failed vote signals discontent with the structure of the pay package, and in particular the unsatisfactory incentive mechanisms, more than it does with the amount of compensation.

However, the say on pay vote is certainly not superfluous and should be further strengthened. We found that UK boards are discussing with their major shareholders what in particular upset them about the pay package. In many cases, the chairman of the board’s remuneration committee reports the reasons the corporation identified for the dissent and the subsequent report provides details of the measures to align the remuneration practices with the interests of the shareholders. It is an important step in the improvement of shareholder communication.

Belgian companies are less transparent. Some companies do not disclose any reason why shareholders disapproved of the remuneration report, and one company even blamed its shareholders for following what it viewed as the misguided recommendations of proxy advisors. Consequently, the support for remuneration reports that follow failed say on pay votes is significantly lower in Belgium than in the UK.

We recommend several ways to improve say on pay. Shareholders are currently allowed only to approve or disapprove a remuneration report once it is complete. They could, however, disclose how they plan to cast their votes either before or during annual meetings, giving the board the chance to take their opinions into account. What’s more, after the votes have been cast, only the UK requires the corporation to identify the reasons for the dissenting votes and the actions it plans to take. The Belgian reports, by contrast, are vague and uninformative.

We also make a plea for an adjustment of the say on pay system. Boards are currently not required to do anything after a losing vote. That’s the nature of an advisory ballot, and it’s at odds with the traditional legal framework of both countries The results of the ballot of other agenda items of the general meeting of shareholders bind the board of directors. A failed vote means that the board must refrain from taking action. To the contrary, we found that one Belgian corporation’s remuneration report failed two consecutive votes, but the company did not adjust its remuneration practices, and shareholders did not express the reasons for their disapproval. According to Semler Brossy, 30 American companies failed a say on pay vote twice – and one even failed in five consecutive years.[7] Other boards merely make superficial changes to their remuneration practices.

One solution would be to make legally binding any say on pay vote that occurs after a failed vote and, in the event of yet another failed vote, to require the board to amend the remuneration practices in accordance with the views of the shareholders.

This responsibility should be shared with the shareholders. Shareholders that continue to be dissatisfied with the remuneration practices have an obligation to explain their reasons for voting down the subsequent report. This rule resembles the Australian two-strike rule. When the remuneration report of an Australian corporation receives opposition of more than 25 percent in two separate votes, a “spill” resolution will determine whether the boards of directors must stand for re-election.[8] Our proposal does not require a resolution to determine whether the board must stand for re-election. Neither does it set the threshold at 25 percent; a majority is required. However, the Australian rule offers one way to structure the process. The combination of an advisory and a binding vote might avoid repeated rejections of CEO pay.

This procedure can also discourage shareholders from voicing their discontent with remuneration practices by voting no on other agenda items. In a study with Lafarre[9], we found that when shareholders of a Dutch corporation disagreed with a proposed CEO bonus (one of the say on pay voting items in the Netherlands), they refused to discharge the supervisory board. The company received negative press. Only when the board promised not to provide this kind of bonus in the future did the shareholders approve the discharge of the board members in the next general meeting.


[1] http://www.semlerbrossy.com/wp-content/uploads/SBCG-2016-SOP-Report-07-27-2016.pdf

[2] Kronlund, M. and Sandy, S., Does Shareholder Scrutiny Affect Executive Compensation?, November 20, 2015. Available at SSRN: http://ssrn.com/abstract=2358696.

[3] Iliev, P. and Vitanovy, S., The Effect of the Say-on-Pay in the U.S., February 1, 2015, Available at SSRN: http://ssrn.com/abstract=2235064.

[4] Van der Elst, C., Anwering the Say for No Pay, August 1, 2016, Available at SSRN: http://ssrn.com/abstract=2818502

[5] http://clsbluesky.law.columbia.edu/2013/08/26/the-scope-of-international-say-on-pay/

[6] In the meantime the UK also introduced a mandatory, binding vote of the remuneration policy.

[7] http://www.semlerbrossy.com/wp-content/uploads/SBCG-2015-Year-End-Say-on-Pay-Report.pdf

[8] See R. Thomas and C. Van der Elst, “Say on Pay around the World”, Washington University Law Review 2015, vol. 92, nr. 3, 670-673.

[9] Van der Elst, C. and Lafarre, A., “Shareholder Voice on Executive Pay: A Decade of Dutch Say on Pay”, European Business Organization Law Review, 2016/17, to be published.

This post comes to us from Professor Christoph Van der Elst at Tilburg Law School in the Netherlands. It is based on his article, “Answering the Say for No Pay,” which is available here.