Companies are either surprised by the say-on-pay provision in the financial reform bill or dismissing its importance, judging from a new Towers Watson survey.
It found that only 12 percent of respondents said they are very well prepared for the say-on-pay legislation, while 46 percent said they were somewhat prepared. Some 22 percent said they didn't know if their companies were ready.
The financial reform legislation awaiting final action in the House and Senate includes a say-on-pay provision that gives shareholders of publicly traded US companies a non-binding vote on executive pay.
This lack of preparedness comes as a surprise, at least to the authors of the survey. "The perceived lack of preparedness for this new environment is quite noteworthy," said Andrew Goldstein, a senior executive compensation consultant with Towers Watson.
"Maybe, because this legislation has been so long in coming, companies may not yet take say-on-pay seriously," Goldstein added. But even though the provision is non-binding, he said it "shouldn't be taken lightly," because "most companies that have voluntarily adopted say-on-pay have received strong support."
Were companies to take the provision seriously, they would have their hands full, Goldstein said. Among other things, they would have to take a hard look at elements that could possibly be viewed as "shareholder unfriendly" such as tax gross-ups, certain perquisites and so-called single-trigger change-in-control provisions in incentives and employment contracts.
As for what they are actually doing, 69 percent said they were identifying potential executive pay issues and concerns in advance; 60 percent said they were improving their Compensation Discussion & Analysis to better explain the executive pay program's rationale and appropriateness for the company. Furthermore, 44 percent are discussing areas of concern with proxy advisors, meeting with key institutional shareholders (29 percent) and 23 percent said they are preparing a formal communication plan.
However, three companies in the US received less than 50 percent shareholder support this year in say-on-pay votes, while others were expecting more favorable votes than they received.
The consultant insists these companies are missing the boat. "Even though those votes are only advisory, for companies receiving lower levels of shareholder support for their pay programs, say on pay will be a wake-up call that is almost certain to provoke changes in how executives are compensated," Goldstein insisted.