The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which became law in July 2010, will require public companies to include in their 2011 proxy statements a shareholder resolution on the compensation of their named executive officers. The vote on this resolution, known as say-on-pay, is required to be held at least once every three years. To allow shareholders to express their preferences on the frequency of the say-on-pay vote — whether it should occur every year, every other year, or every third year — Dodd-Frank also requires public companies to conduct a separate shareholder vote on the future frequency of the say-on-pay vote. The vote on the frequency of say-on-pay, known as “say-when-on-pay,” must be held in 2011 and every six years thereafter.


The SEC published proposed rules to implement the say-on-pay and say-when-on-pay voting requirements in October 2010, with final rules expected by March 2011. Under the proposed rules, companies’ proxy cards must enable shareholders to vote for any of the three say-when-on-pay alternatives or abstain, but companies’ management and boards of directors (or compensation committees) also will be able to recommend one of the alternatives to the shareholders. Accordingly, companies are now considering which, if any, of the three alternatives for the frequency of say-on-pay — annual, biennial, or triennial — to recommend to shareholders.

While this decision should be made based on each company’s individual circumstances, there are several factors that favor recommending an annual say-on-pay vote:

  • From a corporate governance and shareholder communications standpoint, annual votes (including relative changes in the vote outcomes from year to year) should help provide management and the compensation committee with closer to real-time and more direct feedback on the company’s current compensation practices, and should better allow management and the compensation committee to measure how they have responded to the prior year’s vote. The trend from one vote to the next may be an important barometer of shareholder views.
  • For companies without staggered boards, an annual vote would be consistent with the annual election of the entire board.
  • Administratively and from a corporate governance perspective, preparing for an annual vote would lend itself to procedural consistency from year to year and therefore may be easier than preparing for a biennial or triennial vote.
  • Many practitioners and commentators believe that annual votes will become more routine from the perspective of shareholders and thus will not engender as much institutional shareholder (or special interest group) scrutiny as biennial or triennial votes.
  • Some commentators believe that, in off years of biennial or triennial say-on-pay votes, institutional shareholders may be more likely to express any dissatisfaction over executive compensation by increasing their withhold/against votes for compensation committee members. The 2011 Updates to the Corporate Governance Policy of Institutional Shareholder Services Inc. (ISS) indicate that, at companies maintaining pay practices that ISS considers to be problematic, ISS will generally recommend a withhold/against vote for compensation committee members in years in which there is no say-on-pay vote on the ballot.
  • If the company were to receive a negative say-on-pay vote and make changes to its pay practices in response, it may not be desirable to wait two or three years for shareholder validation of the changes.
  • Proxy advisory services ISS and the Council of Institutional Investors are supportive of annual say-on-pay votes, as are many (but not all) institutional shareholders.
  • An annual vote would forestall the likelihood of a shareholder proposal for more frequent say-on-pay votes.

Weighing against these factors are several arguments supporting a biennial or triennial say-on-pay vote:

  • Annual votes tend to encourage short-term thinking with respect to executive compensation
  • A biennial or triennial vote may align more closely with the company’s longer-term award cycles and its longer-term approach toward executive compensation
  • A biennial or triennial vote would provide the company’s management and compensation committee with more time to understand the shareholder vote and respond to the results with changes to the company’s longer-term incentive plans that are best measured over a longer awards cycle
  • A biennial or triennial vote may avoid reactionary shareholder votes responding to short-term stock price drops or unusual company events
  • Initially recommending a staggered vote does not prohibit the company from thereafter adopting a more frequent say-on-pay voting policy
  • If the company’s directors are typically elected by a wide margin, the possibility of withhold/against votes for directors in off years under a biennial or triennial regime may not be a serious concern

The decision of which say-on-pay frequency to recommend, if any, should be made by each company’s management and board based on the company’s individual circumstances, such as the nature of the company’s shareholder base (i.e., number of institutional versus retail shareholders), the general level of shareholder satisfaction with company performance and executive compensation practices, and other considerations.

Under the SEC’s proposed rules, the shareholder vote on say-when-on-pay will, like the say-on-pay vote, be advisory and non-binding. The actual frequency determination will be made by the company after the shareholders have voted and in light of the voting results, and will need to be disclosed in the company’s Form 10-K or Form 10-Q following the quarter in which the say-when-on-pay vote occurs.

Under the proposed rules, if the company adopts a policy on the frequency of say-on-pay votes consistent with the plurality of votes cast in the most recent say-when-on-pay vote, it will be permitted to exclude as “substantially implemented” shareholder proposals seeking say-on-pay or relating to the frequency of say-on-pay.