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JOSEPH LAW NEWSBRIEF — “Say On Pay”: Lessons From Keycorp’s 2010 “No On Pay” Vote

By Jonathan D. Joseph*

President Obama is expected to sign the Dodd-Frank Bill in July.  Upon signing, a   mandatory shareholder vote requirement related to executive compensation known as “Say on Pay” will become applicable to about 10,000 public companies. During the 2010 proxy season, just over 600 public companies included “say on pay” votes in their proxy statements, but only three failed to obtain “say on pay” approval from their shareholders.

One of the three companies whose shareholders rejected executive pay practices in 2010 was Keycorp, an Ohio based regional bank holding company. At its recent annual meeting, 55 percent of the Keycorp shareholders voted against the company’s executive pay practices and it became the first (and only) U.S. banking organization to have a majority of shareholders reject its compensation practices.  The other two U.S. issuers that received “no on pay” votes in 2010 were Motorola and Occidental Petroleum.

Why did Keycorp become the only U.S. banking organization to generate majority opposition to its pay practices while its regional bank peer group and all of the largest U.S. banking organizations did not receive such a rebuke? Prudent senior management teams and public company directors should try to understand the answer to this question well in advance of the 2011 proxy season. Independent compensation committees and management teams that reasonably address existing “red flags” this year should have little trouble obtaining majority say on pay approvals in 2011.

Did Major Proxy Advisory Services Rebel Against Keycorp in 2010?

Published reports suggest that the large dissent appears to have been motivated by a disconnect between large CEO pay increases and KeyCorp’s lagging financial performance. In deed, Keycorp posted losses of $1.34 billion and $1.47 billion for 2009 and 2008, respectively.  This suggestion, while undoubtedly accurate, glosses over some critical blunders by Keycorp’s compensation committee related to executive pay disclosures and 2009 compensation decisions.  Numerous other banking organizations posted losses and other regional bank peers increased executive compensation in 2009 (e.g., Fifth Third Bancorp, Regions Financial and PNC Financial), but all received overwhelming “say on pay” approvals.

It is important to note that “say on pay” votes are nonbinding advisory votes and that the boards of public companies are under no fiduciary obligation to follow or consider the votes.  However, shareholder rejection of executive compensation practices sends a strong message to management and directors to revisit and revise problematic pay policies since compensation committee members and other directors that don’t respond adequately may be on the hot seat the following year.  Additionally, unlike prior years, the Dodd-Frank Bill prohibits discretionary broker voting, also known as  broker non-votes, in connection with executive compensation proposals. This will set the bar higher for say on pay votes in future years.

The 2009 base salary of KeyCorp’s CEO rose to $1.6 million from $1 million, according to SEC disclosures, and the compensation committee increased his annual base salary by $2.3 million in September 2009.  Overall, the CEO’s pay package was reported to be worth about $5.1 million in 2009 compared to $4.5 million in 2008.  His restricted stock and option awards were $3.4 million as of the date they were granted, up from $3.3 million in 2008.  The CEO, who has been an employee for 37 years, also had an accumulated supplemental pension benefit totaling more than $21 million.

It isn’t easy to tease out the factors that motivate shareholders to disapprove compensation practices. Increasingly, however, a number of proxy advisory services such as Institutional Shareholder Services (ISS), Glass, Lewis & Co. (Glass Lewis) and Proxy Governance, Inc. (PGI) influence the outcome of many public company proposals – including say on pay.  Thus, boards and executives should be especially mindful of the proxy voting policies of the major shareholder advisory services on management say on pay proposals.  Keycorp’s shares are mostly held by institutional holders – recent figures indicate about 83%.  Since the final no vote tally equaled 55 percent, well over half of Keycorp’s institutional investors must have voted against the proposal.

It is reasonable to conclude that the major reason many of Keycorp’s institutional investors dissented was because one or more of the major proxy advisory services recommended against Keycorp’s say on pay proposal.

Problematic Pay Practices Trigger No on Pay Votes

The likelihood that shareholder advisory services, large institutional shareholders and other sophisticated shareholders will vote against management say on pay proposals is directly related to the level of problematic pay practices that are identified for a company. No single problematic practice or red flag will necessarily cause a significant vote shift, but when the compensation problems accumulate, the likelihood of a shareholder revolt or proxy advisory dissent recommendation increases exponentially.

Keycorp’s 2010 proxy statement revealed numerous red flags including, among others, the following: (i) Keycorp did not achieve the 2009 overall profitability or credit quality performance measures that had been set by the compensation committee; (ii) in September 2009, the CEO was awarded a $2.3 million annualized  base salary increase, which upped his 2009 base by over $600,000 in the fourth quarter and locked in a significant base compensation increase for the subsequent year; (iii)  the CEO and three other named executive officers received “time-lapse” option grants that were significantly larger than any other option grants in recent company history and which contained no performance vesting criteria; (iv) the comp committee only considered  peer group benchmarks for total pay rather than separately benchmarking each significant compensatory element; (v) the comp committee didn’t freeze the company’s supplemental pension plans until January 2010, allowing the CEOs accumulated retirement benefit to increase during 2009 by almost $3 million to over $21 million; (vi) the compensation committee lowered its executive stock ownership requirements from  2008 levels; and (vii) the compensation discussion and analysis (CD&A) was vague, confusing and failed to adequately offer the “why” as to many of the company’s compensation decisions.

The above described pay practices, while not exhaustive, are indicative of the types of factors that can be catalysts for careful scrutiny and dissent by investors.  Practices that are inconsistent with a performance-based compensation philosophy, poorly designed incentives that promote excessive risk-taking or that don’t encourage long-term value creation and conflicts of interest should be frowned upon as they could contribute to a rejection of a company’s executive compensation by shareholders.  More than ever, compensation committees will need to take a fresh look at executive compensation with the assistance, whenever appropriate, of independent consultants and legal advisers.

Say On Pay Outcomes in 2011 Will Be Determined Based on 2010 Decisions

Compensation disclosures in the 2011 annual meeting proxy statements of all public companies will be based on compensation practices and decisions made in 2010.  To achieve a successful say on pay vote in 2011, it is important for boards and management to understand that the “say on pay” proposal will be based on a resolution that asks shareholders to approve the 2010 compensation of executive officers as set forth in the proxy statement.  This means that potential problematic pay practices and concerns of key shareholders (and proxy advisory services) should be identified as soon as possible so that appropriate mitigation procedures and policies can thoughtfully be implemented in advance of the next annual meeting. Companies should not underestimate the fact that broker non-votes will not be permissible in connection with executive compensation proposals commencing in 2011.


For more information contact:

Jonathan D. Joseph at 415.817.9200, ext 9 or Jonathan Cohen at 415.817.9200, ext 8.

*Jonathan D. Joseph is the founder and Chief Executive Officer of Joseph Law Corporation,  San Francisco, CA. His practice is devoted largely to complex corporate, banking, securities, venture capital and bank regulatory matters. The firm also has an executive compensation, labor and employment and litigation practice. Mr. Joseph has been a frequent lecturer and writer on subjects relating to banking, financial institutions, corporate and securities law, mergers and acquisitions and venture capital. Mr. Joseph is a member of the California, New York and DC Bar.

This communication is provided as a general informational service to clients and friends of Joseph Law Corporation. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states. Please note that prior results discussed herein do not guarantee similar outcomes.  © 2010 Joseph Law Corporation.  All Rights Reserved.

Joseph Law Announces Monthly Fixed Fee Model for Employment and Corporate Law Matters as Alternative to Traditional Hourly Billing

SAN FRANCISCO, CAJoseph Law Corporation announced today that it has begun offering a subscription fee model for employment, transactional, corporate and securities law services as an alternative to the traditional hourly billing format utilized by most business oriented law firms.  “Business clients, particularly those with recurring legal costs and matters, are requiring alternative billing models as an option to the hourly rate structure.  The fixed fee subscription provides predictability and drives down legal costs while encouraging clients to seek legal input earlier.  It is a perfect solution for businesses that routinely require employment and HR advice or have recurring transactional, contract, bank regulatory or securities law counseling needs and are tired of ever increasing legal costs,” said Jonathan Joseph, the firm’s chief executive officer.

The fixed fee subscription eliminates hourly billing and provides unlimited legal counseling within all agreed upon core areas.  With a subscription model, the client is empowered to invite its lawyers to participate sooner since the meter doesn’t’ start running every time the client calls. While alternative billing has become more popular in recent years, Joseph Law is one of the first California based law firms to craft a monthly subscription fee model for banks, venture capital firms and public corporations with legal service needs related to transactional work such as venture capital financing, employment and labor law matters including executive compensation, bank regulatory and corporate issues, contract negotiations and securities disclosure matters.

Our fixed fee subscription service is easy to implement.  Each client’s fee is based on that particular client’s needs within defined core areas.  The first month is an initiation month with a flat fee that covers all of our services within the agreed upon core areas. During the month, our lawyers meet with the client’s executives and other key personnel, attend board or planning meetings and otherwise learn the client’s business. At the end of the month, we meet with the client and agree upon a fixed monthly rate going forward.  In practice, the Joseph Law monthly fixed fee model tends to reduce business annual legal costs within defined core areas by as much as 40%.  That fixed rate continues until either party requests an adjustment and is usually reset annually.

The fixed fee or flat fee billing structure is informed by Joseph Law’s senior lawyers’ years as billing partners at large national law firms that emphasized the billable hour model.  Jonathan  Joseph worked as a partner for many years at Pillsbury Winthrop and Kirkpatrick & Lockhart (now known as K & L Gates) while Jonathan Cohen was a litigation partner at Winston & Strawn and Kirkpatrick & Lockhart.

Joseph Law Corporation is an AV® rated firm based in California that emphasizes complex banking, corporate, regulatory, transactional and litigation matters for financial institutions, private businesses, public companies and venture capital firms.  Joseph Law is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized capabilities typically found only in the largest American law firms.   For additional information, please visit the firm’s website.

For more information:

Jonathan M. Cohen can be reached at or at 415.817.9200, ext 8.

Jonathan D.  Joseph can be reached at or at 415.817.9200, ext 9.


This communication is provided as a general informational service to clients and friends of Joseph Law Corporation. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. These materials may be considered Attorney Advertising in some states. Please note that prior results discussed in the material do not guarantee similar outcomes.