What to Expect in the 2013 
Say-On-Pay Season

The introduction of mandatory say-on-pay pressured companies and compensation committees to ensure that pay programs were aligned with company performance and strong governance practices. Where companies have failed to convince stockholders that executive pay is fair and warranted, one of two conditions has typically been present: (1) poor total shareholder return (TSR) without an accompanying significant adverse impact on compensation or (2) egregious or problematic pay practices.

Of these two issues, the author expects the most important for the 2013 proxy season will be poor TSR without a significant adverse impact on compensation. Compensation committees have been largely responsive to the critiques of problematic pay practices by major shareholder advisors, such as Institutional Shareholder Services (ISS) and Glass-Lewis.

While improved financial performance will typically translate into improved stock price performance over the long-term, there is no guarantee that financial performance will lead to shareholder returns near-term. As a result, a company may find that its annual salary plus actual bonus is not sensitive to changes in TSR.

The relationship between pay and performance will be a key driver in 2013 say-on-pay voting. Shareholder advisory groups will continue to focus on the relationship between TSR and company pay levels, relying largely on the summary compensation table. Where there may be a disconnect between disclosed compensation levels and company performance, companies may benefit from supplemental disclosures that help illustrate the relationship between actual realized or realizable pay and company performance.