Say-on-Pay in the U.S. and UK: The Impact on Executive Compensation and Public Company Disclosure

Bloomberg Law®, an integrated legal research and business intelligence solution, combines trusted news and analysis with cutting-edge technology to provide legal professionals tools to be...

Contributed by Lillian Tsu, Jennie. E. Ingram, Elizabeth Slattery and Jo Broadbent, Hogan Lovells Int

While executive compensation and allegations of excessive executive compensation have long been a “hot topic” in the U.S., a shareholder vote on executive pay, commonly known as “say-on-pay,” was not broadly required for U.S. public companies until the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (Dodd-Frank Act) in July 2010. Now, with the passing of the Dodd-Frank Act, all U.S. public companies are required to include a shareholder advisory vote on executive compensation. In the UK, the right for shareholders in quoted companies to hold an advisory vote on executive pay is already well established. The right was introduced by the Directors Remuneration Report Regulations 2002 (SI 2002/1986) (now replaced by the Large and Medium-sized Companies and Groups (Accounts and Report) Regulations 2008 (SI 2008/373)) (Regulations) for financial years ending on or after 31 December 2002.

The question corporate boardrooms and shareholders alike are asking is: will mandatory say-on-pay votes affect U.S. executive compensation practices? Because this is the first year of mandatory say-on-pay votes in the U.S., it is difficult to predict precisely how executive compensation will be affected in the long-term. In the short period of time since implementation, two noticeable trends have developed: 1) companies are more open to a dialogue with shareholders to justify compensation decisions and practices; and, 2) companies facing significant “no” votes are more willing to change future pay practices (and in some instances even prior awards) in order to ensure that shareholders vote in favor of the company’s executive compensation. This article examines these trends against the background of the impact the Regulations have had on executive compensation in the UK.


Before the enactment of mandatory say-on-pay, relatively few U.S. public companies voluntarily included a say-on-pay proposal for their shareholders to approve or disapprove of the company’s executive compensation. Some of these proposals were the result of shareholder activism where a shareholder would submit their own proposal to the company asking that the company include an advisory vote on say-on-pay. A target company may include the say-on-pay proposal in the following year if the shareholder’s proposal successfully wins over a majority of the votes cast. Companies who have included the say-on-pay proposal as a result of this process include Cisco Systems, Tech Data Corporation, Honeywell International Inc., Valero Energy Corporation, and Pfizer Inc. A smaller group of U.S. public companies voluntarily included management-sponsored advisory say-on-pay proposals, including Aflac Incorporated and American Express Company. Finally, beginning in February 2009, the Troubled Asset Relief Program (TARP) required any recipient of TARP funds during the period for which the financial assistance remains outstanding to give its shareholders an advisory vote on the company’s disclosed executive compensation.

These early say-on-pay proposals provided minimal insight into the impact of say-on-pay votes on companies’ compensation practices because the pool of companies adopting say-on-pay proposals was relatively small and, for the most part, companies voluntarily adopting a say-on-pay proposal were fairly confident that their shareholders would vote in favor of existing executive compensation practices. In 2009, no major U.S. company lost a say-on-pay vote. However, in 2010 companies and corporate governance activists began to see the tide turn – Motorola Inc. and Occidental Petroleum Corp. both lost say-on-pay votes by a margin of approximately 4 percent in each case.


In January 2011, as mandated by the Dodd-Frank Act, the U.S. Securities and Exchange Commission (SEC) adopted rules that require all U.S. public companies to hold shareholder advisory votes on executive compensation. Companies that are not “smaller reporting companies” under the SEC’s rules are required to include say-on-pay votes in proxy statements relating to the first annual or special shareholders meeting involving the election of directors held on or after 21 January 2011. Smaller reporting companies (generally an issuer that has a public float of less than $75 million or, in the case of an issuer that has no public float, has annual revenues of less than $50 million) must include say-on-pay votes in proxy statements relating to the first shareholders meeting held on or after 21 January 2013 at which directors are elected. Thus, the spring of 2011 was the first “proxy season” that includes mandatory say-on-pay shareholder votes.

Under the Dodd-Frank Act, U.S. public companies (other than smaller reporting companies) are required to present to their shareholders an advisory vote to approve executive compensation at least once every three years. Under the rules, the say-on-pay proposal must indicate that the shareholders are asked to approve the compensation of the company’s chief executive officer, chief financial officer and the three most highly compensated executive officers of the company. The say-on-pay vote must cover executive compensation as disclosed in the section entitled Compensation Discussion and Analysis (the CD&A) and the compensation tables and other narrative executive compensation disclosures made in the company’s proxy statement mailed to shareholders. The say-on-pay vote is an advisory vote, and not binding. Therefore U.S. public companies are not required to change executive pay practices as a result of a failed say-on-pay vote.

The rules promulgated under the Dodd-Frank Act also require additional proxy statement disclosure, requiring companies to disclose in the following year’s CD&A whether and, if so, how they have considered the results of the most recent say-on-pay vote in administering their compensation policies and decisions. The disclosure must address how that consideration has “affected” the company’s compensation policies and decisions.

— Impact of Say-On-Pay Votes on U.S. Public Companies

The say-on-pay vote has already impacted the manner in which companies review executive pay practices and the way companies justify these pay practices to their shareholders. To ensure votes in favor of existing pay practices, companies are more open to a dialogue with shareholders to explain compensation decisions and practices.

Although the say-on-pay vote is non-binding, shareholder rejection of a company’s executive compensation pay practices has resulted in negative publicity and media scrutiny. As a result, public companies are making extraordinary efforts to win shareholder approval for executive pay practices, which in turn is leading to some shifts in company practices. Overall, the vast majority of U.S. public companies have received shareholder approval of their executive compensation programs. By the beginning of June 2011, approximately 2,647 proxy statements containing the say-on-pay advisory vote proposals had been filed, with only 35 companies failing the say-on-pay advisory vote.

While most U.S. public companies did not need to change their compensation policies as a result of the mandatory say-on-pay rules, a number of large public companies in the U.S. were in danger of failing say-on-pay votes prior to their annual meetings. To ensure shareholder approval, many of these companies undertook an active communication campaign to justify compensation decisions to shareholders. Some even took the unusual step to file additional materials addressed to their shareholders to rebut claims of poor pay practices. For example, Alcoa, Inc. sent a communication to certain shareholders eight weeks after mailing their proxy statement and a little over one week before their annual meeting, urging shareholders to vote for the company’s executive compensation. In this communication, Alcoa outlined the measures it recently took to improve its compensation practices, including increased stock ownership requirements for executives and the adoption of a double trigger standard upon a change in control. Alcoa also made telephone calls to certain of its shareholders to urge their support as well. Other companies that filed additional definitive materials include Exxon Mobil Corp, Amgen Inc. and Dr. Pepper Snapple Group Inc.

This type of open dialogue marks a significant change in the shareholder-board relationship. Prior to the mandatory say-on-pay votes, companies provided the executive compensation disclosure required by SEC rules without further dialogue with shareholders. The fact that companies are engaging in more open dialogue to win shareholder support demonstrates that say-on-pay proponents are getting what they want – an opportunity for shareholders to react to executive compensation decisions and an ability to influence the board’s perspective.

In addition to more open communication between shareholders and the board, mandatory say-on-pay in the U.S. has led some U.S. companies to the unprecedented act of amending prior compensation decisions in order to win shareholder approval. For example, General Electric Co. and Lockheed Martin Corp. secured shareholder support for executive compensation disclosure after contractually changing previously granted stock options awarded to their chief executive officer to include forfeiture provisions subject to performance metrics. Walt Disney Co. amended the employment agreements for its chief executive officer and three other executives to remove “gross-up” provisions that provided for the payment of taxes on payments made to executives in connection with a change in control. In each of these cases, the companies made significant changes to certain aspects of their executive compensation practices in order to gain shareholder approval for the say-on-pay vote.

— Influence of Investor Advisory Firms

The mandatory say-on-pay vote has also increased the prominence of proxy advisory firms in the executive compensation dialogue. In the U.S., the Institutional Shareholder Services (ISS), a proxy advisory service which advises large institutional shareholders on how to vote in corporate elections, has played a large role in the first year of mandatory say-on-pay by recommending “no” votes for U.S. public companies that fail the ISS’ methodology for reflecting pay for performance. In the examples of the companies discussed above, a preliminary recommendation by ISS for shareholders to vote “no” on the company’s say-on-pay proposal triggered the companies to engage in dialogue with its shareholders and to change prior compensation practices in order to change the ISS vote recommendation. Some argue that these changes do not reflect a shift in company willingness to engage with shareholders on executive compensation matters, but rather reflect the significant influence that ISS has with institutional investors.


In the UK, the Regulations introduced two new duties: a requirement to produce a directors’ remuneration report (DRR) containing specified information, and a duty to hold a shareholder vote to approve the DRR at the company’s annual general meeting. The Companies Act 1985 (CA 1985) made it clear that the outcome of the vote was advisory only. Section 241A(8) CA 19851 provided “[n]o entitlement of a person to remuneration is made conditional on the resolution being passed by reason only of the provision made by this section.”

According to the Department for Trade and Industry (DTI),2 the responsible Government department at the time, there were three main reasons for introducing the Regulations. These were to increase transparency in executive pay, improve accountability, and link pay and performance more effectively. The intention was not explicitly to limit growth in executive pay, despite concern at that time in some quarters at executive pay levels, particularly where executive directors received substantial termination payments despite a company’s poor performance. These concerns were not fully addressed by provisions making compensation payments to directors for loss of office subject to shareholder approval,3 as approval was not required for payments made in good faith in discharge of an existing legal obligation (such as payment for the director’s notice period).

— Contents of the Report

Under the Regulations, DRRs must contain specified information about a company’s remuneration policies and practices, including information about:

  • The company’s remuneration policy;
  • The performance conditions attaching to directors’ share options or under long term incentive plans (LTIPs), including the reasons why such performance conditions were chosen;
  • Notice periods and termination payments;
  • Liability in the event of early termination of a director’s service contract;
  • Salary, bonuses, expenses, benefits and termination payments paid to each director in the relevant financial year; and
  • Share options held, awarded or exercised in the particular financial year, along with information about any LTIPs and pension schemes in which each director participated.

Since 2009, companies have also had to explain how the pay and conditions of other employees has been taken into account in deciding directors’ remuneration in the relevant financial year.

— What Difference Have the Regulations Made?

In November 2004, Deloitte produced a report on the Regulations for the DTI.4 This concluded that at a practical level, the amount of consultation between shareholders and boards had increased substantially as a result of the Regulations, and that the general clarity of disclosure had also improved. Research carried out by Ferri and Maber5 also indicates that the introduction of the Regulations seems to have resulted in a general reduction in notice periods to one year (consistent with the recommendations set out in the UK Corporate Governance Code) and to a significant reduction in the proportion of companies allowing “retesting” in relation to performance based vesting conditions in share plans.

The Deloitte research also suggested that the number of negative votes had decreased over time, perhaps as a consequence of better communication between companies and shareholders. More recent research by Conyon and Sadler6 suggests that this trend continued at least in the 2004 to 2007 period, with the proportion of shareholders registering a dissenting vote dropping from approximately 10 percent on average in 2003 to nearer 6 percent in 2007. It is not clear whether recent turbulent economic conditions have resulted in a higher proportion of negative votes on DRRs, although a number of votes in 2011 have generated relatively high levels of dissent.7

— The Impact of a Negative Vote

Negative votes have in practice been relatively uncommon and as they are advisory, have no impact on the pay directors actually receive in the relevant year. However, negative votes tend to be high-profile and seen as a declaration of no-confidence in a company’s remuneration committee.

In many cases a vote of no-confidence will lead to further consultation with institutional shareholders and amendments to a company’s remuneration policies in the subsequent financial year. For example, following a negative vote on its remuneration report in 2009, a leading oil and gas firm agreed not to award bonuses to directors who failed to meet their targets and to pay a greater proportion of bonuses in shares, in order to “better align remuneration policy with shareholder interests.”8

The Regulations do not seem to have had much impact on levels of executive pay. “A long term focus for corporate Britain,”9 a Call for Evidence produced by BIS in October 2010, states that average pay for a chief executive officer (CEO) of a FTSE 100-listed company rose from £1,002,441 in 1998 to £3,747,000 in 2009. Average CEO pay is now 115 times that of average employee earnings, in comparison with a multiple of 47 in 1998. Further, the BIS study suggests that “[t]here is little evidence that company performance is the main driver of the level of executive pay. The greatest determinant of the level of executive pay remains firm size, not executive performance.”10 Responses to the Call for Evidence suggested that disclosure and benchmarking may in fact have had the effect of ratcheting up executive pay,11 presumably because it is easier for directors to compare their remuneration with that of their competitors.

— Possible Future Developments

The BIS Call for Evidence also asked whether there should be additional disclosure requirements to make the link between pay and meeting corporate objectives, performance criteria for bonus schemes and the relationship between the pay of employees and directors more transparent. In a separate consultation on “The Future of Narrative Reporting,”12 BIS has also been seeking views on whether DRRs provide “clear and usable information” about total director remuneration and its composition, performance criteria, how company performance is measured and the process by which director remuneration is decided.

Responses to both consultations were mixed, although there was some support for improving transparency in reporting on the link between pay and objectives. Responses from institutional shareholders indicated that much of the information contained in DRRs is standardized and does not adequately explain the link between remuneration and performance. Although one respondent called for the advisory vote on executive pay to become binding, this did not appear to command widespread support and there was no clear agreement on whether industry best practice guidelines or further legislation was the preferred route for improvement. Further proposals are expected in the summer.

At European level, the European Commission recently published a green paper on the EU corporate governance framework,13 asking whether disclosure of executive remuneration should be mandatory and whether it should be compulsory to put such a report to a vote by shareholders. The UK clearly already meets both these requirements, but it would be a major change if the Commission were to introduce legislation requiring that a binding, as opposed to advisory, vote on executive pay be held each year. Consideration would have to be given to how this would interact with the executive’s contractual entitlement to the remuneration.14 A feedback statement summarizing the results of the consultation is expected during the autumn.


From a U.S. perspective, because mandatory say-on-pay votes are new this year, it would be premature to state that executive compensation pay practices in the U.S. have dramatically changed as a result of the vote. However, it is safe to say that issues of executive pay are no longer solely considered by shareholders to be an important governance matter – both boards and companies have focused on executive pay issues this year and much of that focus is a result of the emphasis placed on executive compensation by the say-on-pay measures implemented by the Dodd-Frank Act.

In the UK, transparency in executive pay has improved, as has communication about remuneration between boards and shareholders as a result of the Regulations. However, giving shareholders a vote on executive remuneration has not necessarily made much difference to the link between executive pay and performance in recent years, although when the Regulations were first introduced they do seem to have encouraged companies to decrease lengthy notice periods in director contracts. In the future, companies may be required to provide more evidence of the link between pay and performance, although at this stage it is not clear whether this will be through best practice guidelines or further legislation developments. What the Regulations do not seem to have done is have a significant impact on total amounts of executive pay.

Lillian Tsu is a partner in Hogan Lovells’ corporate group in New York. She practices in the areas of corporate, securities, and general business law. Her practice includes the representation of publicly held corporations in connection with various business matters. She also represents issuers in connection with private and public securities offerings. In addition, Lillian provides counsel to public and private companies in all aspects of their business, including compliance and reporting obligations under federal securities laws and stock exchange rules, and general corporate governance matters. Telephone: +1 212 918 3599; E-mail:  

Jennie E. Ingram is an associate in Hogan Lovells’ corporate group in New York. Her practice is focused on corporate, securities, and general business law. Jennie represents publicly held corporations in connection with various business matters. She has also represented issuers in connection with private and public securities offerings. Additionally, Jennie provides counsel to public and private companies in all aspects of their business. Telephone: +1 212 918 3540; E-mail:  

Elizabeth Slattery is a partner in Hogan Lovells’ employment group in London. Her practice includes advising on all aspects of employment and employment relations law. In addition, Elizabeth advises on executive employment arrangements and on employee matters arising in connection with all types of corporate transactions, business transfers and outsourcing agreements. Elizabeth has been listed as a leading UK employment law practitioner in both UK and International directories. Telephone: +44 (0) 20 7296 2000; E-mail:  

Jo Broadbent is Of Counsel and a professional support lawyer in the Hogan Lovells’ Employment group in London. Alongside supporting the work of the employment team on all aspects of employment law, Jo liaises closely with colleagues in the firm’s corporate governance and share incentive teams. Telephone: +44 (0) 20 7296 2000; E-mail:  

(c) 2011 Hogan Lovells International LLP


This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.  

©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.  

Request Bloomberg Law®