Udated January 25, 2011
SEC Approves 'Say-on-Pay' Final Rules
On Jan. 24, 2011, the U.S. Securities and Exchange Commission voted to adopt final rules giving shareholders of publicly traded companies the right to weigh in on executive compensation through nonbinding advisory votes—the so-called "say-on-pay" rules implementing a provision of the Dodd-Frank financial reform law enacted in 2010.
The SEC's rules, approved on a 3-2 vote, apply to roughly 9,000 companies listed on U.S. exchanges. However, they exempt for two years nearly 1,500 companies that have less than $75 million in outstanding shares available for trading in public markets.
Under the rules, shareholders also will be able to vote on certain so-called "golden parachute" pay packages in connection with a merger or acquisition, and companies will be required to make additional disclosures about such compensation arrangements.
“The SEC’s new say-on-pay rules are affecting how public companies are preparing for this year's proxy season,” said Andrew Liazos, partner and head of the executive compensation group at law firm McDermott Will & Emery. “The focus has shifted from mere compliance to persuasion. Some issuers are concerned about the embarrassment factor if there is a sizeable number of negative votes.”
However, “It's too early to tell the extent to which say on pay will actually have a material impact on plan design or the overall amounts of executive compensation,” he adds.
Mike Melbinger, lead partner and global head of law firm Winston & Strawn’s employee benefits and executive compensation practice group, highlights key points contained in the final rules:
• Require that issuers present four choices for the vote on the frequency of shareholder say-on-pay votes ( annual, biennial, triennial, or abstain).
• Require companies to address in their proxy statement's "compensation data and analysis" (CD&A) section whether and how they took into account the results of the say-on-pay vote.
• Allow companies to exclude future shareholder proposals on say on pay or the frequency of say-on-pay votes only if the company adopts the provision receiving a majority vote.
• Postpone the requirement for reporting the results of and company's decision on vote frequency on a Form 8-K until 150 days after the annual meeting.
• Bidders need not include the "golden parachute" disclosure and approval in tender offer materials filed with SEC (as they may not have access to that information).
• Delay the say-on-pay requirements for smaller reporting companies for two years.
U.S. companies are split on how frequently they should put their executive compensation programs to a nonbinding say-on-pay shareholder vote, according to a survey by consultancy Towers Watson.
While some companies are making adjustments to their pay-setting processes to prepare for the say-on-pay era, many are not clear on how to assess the success of the vote, and even fewer are prepared to address the results of the shareholder poll, Towers Watson found.
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that public companies:
• At least every three years conduct say-on-pay votes, but the law leaves it to each company to decide whether it will hold annual, biennial or triennial votes.
• At least every six years put the say-on-pay frequency question to a nonbinding shareholder vote.
Regulations issued by the U.S. Securities and Exchange Commission will require public companies to conduct the first of these so-called “say on when” votes in 2011.
The Voting Frequency Decision
Conducted in mid-December 2010, the survey of 135 U.S. publicly traded companies found that:
• 51 percent of respondents expect to hold annual say-on-pay votes.
• 39 percent prefer the vote be held every three years.
• 10 percent expect to hold biennial votes.
Companies have a range of reasons for favoring a particular voting frequency. Four in 10 respondents cited accountability to shareholders and a desire to minimize administrative burdens as factors having the greatest influence on their vote frequency recommendation, while slightly fewer cited shareholder preferences, proxy advisor policies and providing shareholders with an avenue to express concern about executive pay without casting negative votes on other matters as key factors.
“Clearly, there’s no single right answer to the question of how frequently these votes should be conducted that will work for every company,” said Towers Watson senior consultant James Kroll. “Each company seems to be assessing its own circumstances and needs, taking into account its specific shareholder composition and the degree of potential shareholder concern about the company’s executive pay programs.”
Adjusting Executive Pay Setting
Nearly half (48 percent) of surveyed companies are making some adjustments to their executive pay-setting process in preparing for the 2011 proxy season, although many companies have already strengthened their processes in recent years in light of growing shareholder activism and intensifying scrutiny of pay issues. Among those making further changes in preparation for the 2011 proxy season:
• 65 percent are devoting more attention to explaining their executive pay programs in the proxy statement's Compensation Discussion & Analysis (CD&A) section.
• 41 percent are performing additional analyses on the link between their executives’ pay and company performance.
• 30 percent have made or are considering changes to programs such as severance, change-in-control benefits and perquisites that have high visibility.
Defining a Successful Vote
Somewhat surprisingly, almost half (49 percent) of the respondents don’t know what level of favorable shareholder say-on-pay votes will be considered a successful outcome by their boards, and only 8 percent have a process in place for analyzing the results of the vote and developing appropriate action plans in response to potential shareholder concerns. Of those companies that have defined how they will evaluate success, most believe that a favorable shareholder vote of at least 80 percent would be considered successful.
A 'Compelling Story'
“The survey responses suggest that companies are struggling to understand the implications of say-on-pay votes and many are taking a wait-and-see approach to measuring success,” said Kroll. “While many companies have been taking steps to make their executive pay programs more shareholder-friendly in recent years, relatively few have been thinking beyond their first say-on-pay votes to how they will analyze and address shareholders’ input going forward. This new era will require companies to step up their ongoing communication with shareholders and tell a compelling story about how their pay programs help drive business performance, while listening and responding to shareholder concerns. This is not a one-shot deal. It will be a continuous process.”
Stephen Miller is an online editor/manager for SHRM.
Final SEC Rules Regarding Say-on-Pay and Golden Parachutes, Dow Lohnes PLLC, January 2011
Final SEC Rules Implementing Dodd-Frank 'Say on Pay' and 'Say on Golden Parachutes,' Alston & Bird LLP
SEC Adopts Say-on-Pay Final Rule, SHRM Online Legal Issues, January 2011
SEC Issues Proposed Rules on ‘Say-on-Pay’, SHRM Online Legal Issues, October 2010
Say-on-Pay’s Impact Could Be Significant, SHRM Online Legal Issues, July 2010
Most CEOs Overpaid, One in Three Company Directors Say, SHRM Online Compensation Discipline, February 2008
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