January 2014 will mark the third anniversary of the SEC’s enactment of shareholder “say on pay” rules for public companies. For most companies, “say on pay” has created little controversy. The experience of the past three years shows that shareholders regularly approve the executive compensation proposals put before them.
In a significant number of cases, however, they have not. When that has occurred, boards of directors have often decided to adopt the proposals anyway. In many of those cases, the boards’ decisions have been challenged through litigation. Affirming the application of the business judgment rule in the face of the say on pay rules, courts have largely upheld the authority of boards of directors to make informed decisions about executive compensation even in the absence of favorable shareholder votes. Nevertheless, the say on pay rules have re-focused the attention of the securities plaintiffs’ bar on the area of executive compensation.