While the overwhelming majority of the advisory say-on-pay votes required by Dodd-Frank succeed, a number of the boards surprised by a “nay-on-pay” vote now face shareholder derivative lawsuits. So far this year, negative say-on-pay votes have sparked nine derivative lawsuits, and some commentators expect these numbers to rise in 2012. Corporate boards – especially those of companies with disappointing shareholder returns – should be careful when they draft say-on-pay proxies.
Given the odds that a company’s stock price is less-than-stellar these days, boards will want to ensure that they provide shareholders plenty of context for the vote. In other words: don’t be like the guys over at Exar, who doubled the CEO’s pay but failed to explain in an executive summary how their pay-for-performance plan worked. (It didn’t help that they treated abstentions as ‘no’ votes, either – H/T Mark Poerio’s Executive Pay and Loyalty blog.)
Instead, companies should take pains to detail how their compensation package works and address anything that might not sit right with investors – like why management’s pay made a jump even though the stock price took a dump. There can be perfectly legitimate and rational reasons for an executive’s compensation to rise despite poor stock price performance. To avoid embarrassing no votes and litigation, companies should ensure that these reasons find their way into the proxy statement.