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Introduction to the Law of Corporations: Cases and Materials

Say on Pay Vote [Frank-Dodd, Sec 951]

In the wake of the Financial Crisis of 2008, Congress adopted the Frank-Dodd bill.  Section 951 of Frank-Dodd requires regular votes by stockholders to approve executive compensation. In part, this provision was hoped to put a spotlight on high levels of executive compensation and create incentives for directors to constrain the growth of executive compensation levels. In fact, one could argue the opposite has occurred: increased visibility on executive compensation has created incentives for corporations to increase compensation levels for C Suite executives in order to have pay packages that are at least in the top half of peer groups.

Notwithstanding the unexpected result of these "say on pay" votes, note that the structure and effect of the "say on pay" votes are sensitive to the 14a-8 process and comport with what one might expect of other shareholder proposals. When approving the "say on pay" votes, Congress was sensitive to the traditional preeminance of the state corporate law.  Consequently, "say on pay" votes are precatory in nature and are not actually binding of the board of directors.

Given the nature of these precatory votes, the effect of negative "say on pay" votes is to send a signal to managers - short of removing directors - that stockholders are unhappy with the board's performance. To the extent stockholders use voting as a method of communicating dissatisfication with a board's direction, the "say on pay" vote has become a convenient tool for stockholders to send unabiguous signals to corporate directors about how stockholders view their performance. A negative "say on pay" vote is often intended to signal dissatisfaction with board performance that if not rectified may result in a subsequent campaign to replace one or more directors at a future stockholder meeting.