Jeffrey London Discusses Recent Trends in Shareholder Engagement and How They Have Affected Executive Compensation in InsideCounsel
InsideCounsel reports on the various changes in business practices that have occurred as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
According to Kaye Scholer Executive Compensation & Employee Benefits Partner Jeffrey London, increased shareholder engagement is one of the biggest trends to result from Dodd-Frank. He noted that “say on pay” votes, in which shareholders approve executive compensation packages, have been a big factor in this shift, as the results of the votes are publicized and can affect the reputation of the company. “Companies are very concerned not only on their ‘say on pay’ vote passing, but in passing with a large approval percentage. A pass by a 60-40 percent is unacceptable and companies seek at least a 90% shareholder approval,” London said.
London added that because of this desire for approval, companies are making a “greater effort to engage in discussions with at least their more significant shareholders to understand their views on pay and to consider such views in developing and implementing their executive pay philosophy.”
As a result, executive compensation practices are undergoing changes. London continued, “Because of the views of these large shareholders, we are continuing to see movement towards a greater percentage of compensation being paid based on performance targets and objectives, versus merely a ‘pay for breathing’ approach,” adding, “That, too, is a positive trend since the key executives are paid only to the extent they are bringing in value to the shareholders.”
Despite the large role the Dodd-Frank reforms have played in these changes, London pointed out that other factors likely would have led to these shifts anyways. “The ‘say on pay’ requirements may have accelerated the increased movement of pay for performance, but market forces likely would have led us in that direction regardless of Dodd Frank,” he concluded.