On October 31, 2013, shareholders of Oracle Corp. voted “no” to CEO and founder Larry Ellison’s pay package worth $78.4 million (which is actually down 18 percent from the $96.2 million package he received a year earlier for which he also received a “no” vote by Oracle shareholders) (see Oracle Form 8-K filing).  Approximately 56.3 percent of Oracle votes cast at its 2013 meeting were against the pay package. Approximately 82.5 percent of Oracle’s shareholders voted against the 2013 pay package if you back out the 25 percent of Oracle shares owned by Ellison himself. For the US, the Oracle case is atypical since US shareholders usually vote to approve CEO compensation packages. For example, as Steven Hall & Partners have noted, of the 3,114 US companies that have held say-on-pay (SOP) votes in 2013, only 65 companies (or 2 percent)  failed to get shareholder approval.

So, what does this mean for the future of SOP and where we are headed for the US 2014 proxy season? A non-binding vote goes a long way in drawing attention to excessive executive compensation, but it’s still only non-binding, e.g., Ellison will retain his $78.4 million pay package despite the shareholder “no” vote. 2014 will mark the 4th year since SOP disclosure and the corresponding shareholder vote became mandatory for US public companies. It’s likely that the 2 percent of companies that received a “no” vote in 2013 will reconstruct their executive pay packages in the hopes of obtaining shareholder approval on the next go around in 2014. Institutional Shareholder Services (ISS) is likely to continue to wield increasing influence over SOP based on its recommendations of whether to vote for or against management compensation packages, which recommendations many institutional shareholders rely upon.

What’s most interesting about the Oracle case, however, is not the rare shareholder “no” vote that occurred. Rather, going one level deeper, it’s the conundrum that Ellison’s pay package reveals once you deconstruct it. Ellison earns a $1 salary and the bulk of his compensation is the $76.9 million of stock options that vest over several years. Stock options have historically been viewed by many as a way of aligning the interests of shareholders and executive management. Some commentators have raised the question, however, of why Ellison is being given stock options when he already owns a large stake in Oracle, and awarding him millions in additional equity awards is a waste of shareholder resources (not to mention that it makes Ellison, already the third richest man in America with his own private Hawaiian island, even richer). Critics have argued that it’s not so much that Ellison is being paid too much, but rather that he is being given stock at all. Other tech companies have, in some instances, taken the approach of not awarding founders/executives equity compensation on an annual basis; instead, it’s their already significant ownership in their respective companies that drives them to continue steering their companies to success.

It is worth mentioning that ISS accounts for options at the time of grant, using full-term option assumptions; this is inherently different from the less conservative method that companies typically use to expense options based on their value upon exercise. ISS’ methodology has resulted in some companies re-evaluating their long-term incentive designs, and moving towards a mix of options, restricted stock and other long-term incentives. As for Larry Ellison, we’ll have to wait and see whether Oracle takes the recent shareholder “no” vote to heart in 2014.