Is the say-on-pay vote legally binding?

No. Section 951 of the Dodd-Frank Act and SEC Rule 14a-21 explicitly make the vote advisory only — even a 100% "against" outcome does not legally compel the company to change executive pay. However, the practical pressure is significant: failed votes typically trigger compensation overhauls, increased shareholder engagement, and lower votes for compensation committee directors at the next election.

What approval percentage is considered passing?

Technically a simple majority (more "for" than "against") passes the vote. In practice, institutional investors and proxy advisors treat anything below 70% support as a warning, and below 50% as a failed vote. The median Russell 3000 company receives 90%+ support; only about 2-3% of Russell 3000 companies fail their say-on-pay vote in any given year.

How much do ISS and Glass Lewis influence the vote?

A great deal. Empirical research (notably the 2014 Stanford-Rock Center study and several follow-ups) finds that an ISS "against" recommendation reduces shareholder support by roughly 20-30 percentage points; a Glass Lewis "against" reduces support by 5-10 percentage points beyond ISS. Many large institutional investors vote according to their own custom policies but use proxy advisor reports as the starting point.

Do all companies hold a say-on-pay vote every year?

Most do, but not all. Section 951 of Dodd-Frank requires companies to hold a separate "say-on-frequency" vote at least every six years, asking shareholders whether the say-on-pay vote should occur annually, every two years, or every three years. The vast majority of S&P 500 companies hold annual say-on-pay votes; some smaller companies hold them every three years.

What happens at companies that fail their vote?

Companies typically respond with: (1) direct shareholder engagement — outreach to top 20-30 institutional holders to understand objections; (2) compensation structural changes — moving from time-based RSUs to performance-based PSUs, raising performance hurdles, capping payouts, eliminating tax gross-ups or single-trigger change-in-control provisions; (3) enhanced CD&A disclosure explaining the link between pay and performance; (4) peer-group adjustments. Academic research (Ferri et al.) finds that companies with failed votes reduce CEO pay by an average of 10-15% the following year.

Say-on-Pay Explained: How Shareholders Vote on CEO Compensation, CEOPayWatch

Since 2011, the Dodd-Frank Act has required public companies to hold a non-binding shareholder vote on executive compensation at least once every three years. Most U.S. public companies hold this vote annually. The result — typically reported as a percentage of shares voted “for” — has become the single clearest signal of whether institutional investors believe a CEO's pay is reasonable.

What Is a Say-on-Pay Vote?

Say-on-pay (often abbreviated SOP) is an advisory vote at a company's annual shareholder meeting where investors approve or disapprove the compensation paid to the company's named executive officers (the CEO, CFO, and three other highest-paid executives). The vote is on the Compensation Discussion and Analysis (CD&A) section of the proxy statement plus the related compensation tables.

The vote is non-binding. Even if shareholders vote overwhelmingly against the pay package, the company is not legally required to change it. However, a failed or low-approval say-on-pay vote creates significant practical pressure on the board's compensation committee. Compensation committee chairs at companies with low support routinely receive lower votes when they themselves stand for re-election the following year, and proxy advisors will often recommend “against” the entire compensation committee after consecutive low votes.

What Do the Numbers Mean?

Say-on-pay results follow a standard interpretive convention used by proxy advisors and institutional investors:

90%+ Approval

Strong support. Shareholders are broadly satisfied with the compensation structure. The median S&P 500 result.

70-89% Approval

Mixed signals. Proxy advisors (ISS, Glass Lewis) may have recommended against. Board should engage shareholders and consider design changes.

50-69% Approval

Serious concern. ISS policy treats anything below 70% as warranting a Quantitative Pay-for-Performance review. Companies typically make significant compensation changes the following year.

Below 50% (Failed)

Rare but impactful. Only about 2-3% of Russell 3000 companies fail in any given year. Boards typically overhaul pay structure and may face additional governance proposals.

Who Influences the Vote?

Two proxy advisory firms dominate the institutional landscape, and their recommendations are often the strongest predictor of say-on-pay outcomes:

Institutional Shareholder Services (ISS). Advises over 2,000 institutional investors. Uses a quantitative Pay-for-Performance test (relative degree of alignment with peer companies, multiple of median CEO pay versus peers, and CEO pay versus financial performance) plus qualitative factors. An ISS “against” recommendation typically reduces shareholder support by 20-30 percentage points.
Glass Lewis. The second-largest proxy advisor. Uses its own pay-for-performance grading model and publishes detailed proxy voting guidelines updated annually. A Glass Lewis “against” reduces support by 5-10 percentage points beyond what ISS already drives.

Both firms evaluate pay packages against peer groups (typically a curated set of 14-20 size- and industry-comparable companies), three-year financial and total-shareholder-return performance, and governance best practices. Their full proxy voting guidelines are public. Beyond ISS and Glass Lewis, large institutional asset managers — BlackRock, Vanguard, State Street, Fidelity — publish their own proxy voting guidelines and increasingly vote independently on compensation matters at their largest holdings.

What Happens After a Low Vote

Companies that receive low say-on-pay approval — typically defined as below 70% — almost always respond with a predictable sequence of governance actions:

Increased shareholder engagement. Direct outreach to the top 20-50 institutional holders to understand objections, often led by the lead independent director or compensation committee chair.
Changes to compensation structure. Moving from time-based RSUs to performance-based PSUs, raising the difficulty of performance hurdles, capping payouts at 200% of target instead of 250%, eliminating tax gross-ups, removing single-trigger change-in-control vesting, and adding clawback provisions.
Enhanced disclosure. A clearer CD&A explaining the explicit link between pay and performance, and direct response to specific shareholder concerns raised during engagement.
Peer group adjustments. Moving to more appropriate comparison companies if proxy advisors challenged the existing peer group.
Compensation consultant changes. Some boards rotate consultants after sustained low votes.

Academic research finds that companies with failed say-on-pay votes reduce CEO total compensation by an average of 10-15% the following year (see Ferri and Maber, “Say on Pay Votes and CEO Compensation,” Review of Finance, 2013, and subsequent studies).

Say-on-Pay and CEO Pay-for-Performance Grading

Say-on-pay approval is one of four factors in the CEOPayWatch Pay-for-Performance Score, weighted at 20%. High shareholder approval signals that institutional investors and proxy advisors believe the pay structure is reasonable for the company's performance. Low approval suggests a meaningful disconnect between pay and shareholder value creation.

See which companies have the lowest shareholder approval on the Say-on-Pay Watchlist, and explore the worst pay-for-performance alignment rankings to see which CEOs combine high pay with weak shareholder returns.

Legal Background

Say-on-pay was mandated by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), codified as 15 U.S.C. § 78n-1. The SEC's implementing rules (Rule 14a-21 under the Securities Exchange Act of 1934) took effect for the 2011 proxy season. Companies must hold a say-on-pay vote at least once every three years, plus a separate “say-on-frequency” vote every six years to determine whether say-on-pay votes happen annually, biennially, or triennially. The vast majority of S&P 500 companies hold annual say-on-pay votes.

For more on the proxy disclosures themselves, see How to Read a Proxy Statement and How CEO Pay Works.