Management Say on Pay Frequency Proposals (US)
Background and Overview
The Dodd-Frank Act, in addition to requiring advisory votes on pay (MSOP), requires that the proxy for the first annual or other meeting of the shareholders occurring after the enactment include an additional advisory vote to determine whether, going forward, the say-on-pay vote by shareholders to approve compensation will occur every 1, 2 or 3 years. A new vote regarding the frequency of the compensation approval vote must be taken by shareholders not less often than once every 6 years.
The MSOP is at its essence a communication vehicle, and communication is most useful when it is received in a consistent manner. ISS supports an annual MSOP for many of the same reasons it supports annual director elections rather than a classified board structure: because it provides the highest level of accountability and direct communication by enabling the MSOP vote to correspond to the information presented in the accompanying proxy statement for the annual shareholders' meeting. Having MSOP votes only every two or three years, potentially covering all actions occurring between the votes, would make it difficult to create meaningful and coherent communication that the votes are intended to provide. Under triennial elections companies, for example, a company would not know whether the shareholder vote references the compensation year being reported or a previous year, making it more difficult to understand the implications of the vote.
On October 18th the SEC released proposed rules that will require that four options are offered on the frequency vote: annual, biennial, triennial and abstain. While boards are expected to recommend a particular frequency choice, they must make clear that the vote is not a binary approve/disapprove of the issuer's recommendation as most votes are, but rather a broader selection from a menu of choices.
Key Changes Under Consideration
ISS will adopt a new policy to vote in favor of companies providing for annual MSOP proposals.
Intent and Impact
The intent of the proposed policy update is to respond to the new proposal in an effective manner. The SEC has not yet issued rulemaking on this issue, so the specifics are difficult to anticipate. If there are situations where the company offers a menu of options, ISS expects to recommend for the annual vote.
Request for Comment
Please feel free to add any additional information or comments on the proposed policy change. In addition, ISS is specifically seeking feedback on the following:
- Do annual MSOP votes provide the most effective format? Are there circumstances where a different format may be appropriate?
- If shareholders vote in favor of annual MSOPs but the company – given the non-binding nature – adopts another schedule, should that be a consideration in evaluating the MSOP when it does appear?
To submit a comment, please send via e-mail to policy@issgovernance.com. Please indicate your name and organization for attribution. While ISS will consider all feedback that it receives, comments will not be published without attribution.
All comments received will be published as received, unless otherwise requested in the body of the e-mail submission.
Please note: This page was edited on Nov. 8 to remove an inadvertently-included sentence that suggested ISS would recommend votes "against" Frequency resolutions.