What you need to know
The SEC has adopted final rules relating to executive compensation shareholder advisory votes, commonly referred to as say-on-pay, say-on-frequency and golden parachute arrangements.
What you need to do
The compliance date for the Dodd-Frank Wall Street Reform and Consumer Protection Act to which the say-on-pay and say-on-frequency rules relate is January 21. Accordingly, companies are expected to comply now with the SEC’s rules regarding say-on-pay and say-on-frequency, even though the final rules are not yet effective.
On January 25, the SEC adopted final rules relating to shareholder advisory votes on executive compensation. The final rules are largely consistent with the proposed rules, with some limited changes, as identified below in italics. The compliance date for the Dodd-Frank Wall Street Reform and Consumer Protection Act to which the say-on-pay and say-on-frequency rules relate is January 21, meaning that companies are expected to comply now with the SEC’s rules regarding say-on-pay and say-on-frequency. The rules relating to golden parachute arrangements are not effective until April 25.
Public companies are now required, at least every three calendar years, to include in proxy statements that relate to the election of directors a new, separate shareholder advisory vote to approve the compensation of named executive officers. Under the final rules, smaller reporting companies (generally those with a public market capitalization of $75 million or less) are granted a two-year delay in effectiveness of this rule. Foreign private issuers are not subject to this new rule. The say-on-pay vote does not cover compensation paid to directors or the compensation policies and practices as they relate to risk management for employees generally, has a scaled application to smaller reporting companies which are not required to include CD&A in their proxy statement, and does not trigger the requirement to file a preliminary proxy statement.
Consistent with the Dodd-Frank Bill, the final rules implement the say-on-pay vote by requiring the inclusion of a resolution in the proxy statement, and indicate that the following would satisfy the rules:
RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.
The SEC has not yet clarified whether, for companies that do not generally phrase items put to shareholders as a resolution in their proxy statement, the disclosure on this item would need to be styled as a resolution.
The disclosure required to accompany the say-on-pay vote is limited to a description of the general effect of the vote, such as whether the vote is non-binding. While not required, many companies will want to include a supporting statement for the say-on-pay vote, focusing on items such as the pay-for-performance correlation, and not simply rely on a reader being sufficiently diligent to also read the company’s separately provided compensation disclosure included in the proxy statement.
In future years, companies will be required to disclose in their CD&A whether, and, if so, how, the most recent say-on-pay vote and say-on-frequency vote (described below) were considered in determining compensation policies and decisions and how that consideration affected the company’s executive compensation decisions and policies.
In addition to say-on-pay, public companies are now also required, at least every six calendar years, to include in proxy statements that relate to the election of directors a new, separate shareholder advisory vote to determine the frequency of the say-on-pay advisory vote. Similar to say-on-pay, under the final rules, smaller reporting companies are granted a two-year delay in effectiveness of this rule. Foreign private issuers are not subject to this new rule. Shareholders are to be given the choice to vote whether the say-on-pay vote should be held every year, every other year or every three years or to abstain, and inclusion of the say-on-frequency vote would not trigger the requirement to file a preliminary proxy statement. The final rules clarify that companies may vote uninstructed proxy cards in accordance with management’s recommendation for the frequency vote if the company includes a recommendation in the proxy statement, permits abstention on the proxy card and includes in bold type on the proxy card language regarding how uninstructed shares will be voted.
Different from say-on-pay, no example is given of a resolution that would satisfy the requirements of the rules. In the absence of a required format, companies have been including a resolution similar to the following:
RESOLVED, that the company’s shareholders determine, on an advisory basis, that the frequency with which the company’s shareholders shall have an advisory vote on the compensation of the company’s named executive officers set forth in the company’s proxy statement is:
Choice 1 – Every year,
Choice 2 – Every two years,
Choice 3 – Every three years, or
Choice 4 – Abstain from voting.
The required disclosure to accompany say-on-frequency is limited to a description of the general effect of the vote, such as whether the vote is non-binding, and, after the first year, a statement of the current frequency of the say-on-pay advisory vote and when the next such advisory vote will occur. While not required, many companies will want to include a supporting statement for the say-on-frequency vote, particularly if a choice other than an annual vote is recommended. In making a recommendation, companies will want to consider a range of factors such as:
- whether an annual vote would put pressure on a company to be more reactive to short-term conditions than long-term trends in its business,
- its shareholder base, and
- that Institutional Shareholder Services has indicated that it will support an annual vote (though ISS has not indicated that a biennial or triennial vote would constitute a poor pay practice).
In addition to reporting the results of the vote within four business days on Form 8-K, the final rules require a company to disclose on a Form 8-K, filed not later than 150 days from the date of the shareholder meeting (or, if earlier, no later than 60 days from the deadline for submission of shareholder proposals pursuant to Rule 14a-8), its decision in light of such vote as to how frequently the company will include a say-on-pay vote in its proxy. The proposed rules had contemplated this disclosure in the company’s next Form 10-Q or, if earlier, Form 10-K.
No SEC mandated voting standard applies to this vote, and companies will instead be subject to the voting standard specified in their by-laws or other governing documents and the requirements of state law. Companies that have adopted a frequency of a say-on-pay vote approved by a majority (and not plurality, as contained in the proposed rules) of votes cast in the most recent shareholder vote may exclude a shareholder proposal under Rule 14a-8 relating to say-on-pay or say-on-frequency as having been substantially implemented.
Golden Parachute Disclosure and Vote
In connection with proxy statements relating to an acquisition, merger, consolidation or proposed sale of all or substantially all of the company’s assets, companies are now required to provide expanded disclosure and seek shareholder advisory approval of compensation arrangements, commonly referred to as golden parachute payments, arising from or related to the proposed transaction. Disclosure, but not shareholder advisory approval, is also required in connection with an issuer self-tender or going private transaction, and in registration statements on Form S-4 and F-4 relating to business combinations and Schedule 14d-9 solicitation/recommendation statements. The final rules also provide that an acquiring company seeking shareholder approval to issue shares in the transaction is subject to the disclosure, but not voting, portion of the rule.
The golden parachute disclosure and vote rules are effective for filings made on or after April 25. There is no two-year phase-in for smaller reporting companies with respect to this new rule. However, the final rules do provide that disclosure is not required of compensation arrangements with senior management of foreign private issuers where the target or acquirer is a foreign private issuer.
While similar to the already existing required disclosure of termination or change-in-control payments, the new disclosure differs in that it is required to:
- present information related not only to relationships between the company and its named executive officers, but also between the acquiring company and the named executive officers of the target company, if the soliciting company is not the acquiring company (though the shareholder advisory vote, if required, would be limited to the arrangements between the company and its named executive officers),
- present the information in a specified tabular format,
- identify the total amount of compensation based on or triggered by the transaction,
- include disclosure of arrangements generally available to salaried employees, and
- include disclosure of de minimus perquisites and other personal benefits.
A shareholder advisory vote on golden parachute compensation is not required if disclosure of that compensation had been included in the executive compensation disclosure that was subject to a prior shareholder advisory vote. This exception would not permit exclusion of the golden parachute vote if, for example, the named executive officers had changed since the prior vote, there had been a change to the arrangements that resulted in an increase in value of the payments, or there had been an increase in salary that resulted in an increase in value of the payments, in each case to the extent not approved by the prior shareholder advisory vote.
We expect that most companies will not voluntarily seek shareholder advisory approval of these payments, and that most companies will instead only seek such approval when required.
Practical Guidance for the 2011 Proxy Season
In implementing the new rules for the 2011 proxy season, companies will want to keep in mind the following:
- While not required, supporting statements should be considered for say-on-pay and say-on-frequency. Companies will want to consider including a supporting statement to advocate their recommended outcome, particularly for say-on-pay and, if a non-annual vote is sought, for say-on-frequency.
- Companies seeking other than an annual vote on say-on-frequency should be prepared to actively campaign. The annual vote position adopted by Institutional Shareholder Services means that companies seeking other than an annual vote will need to actively engage with their shareholders.
- An executive summary to CD&A is increasingly valuable. Companies will want to consider including and enhancing their executive summary to CD&A, emphasizing the pay-for-performance correlation.
- Companies will likely decide to omit any optional golden parachute advisory vote. Companies will want to think carefully before this optional advisory vote is sought, keeping in mind that changes to these payments, including from an increase in base salary that results in higher payments or a change in named executive officers, would require a new vote in connection with a sale transaction.
- There is no broker-dealer discretionary voting on say-on-pay, say-on-frequency or golden parachutes. Companies will need to actively solicit shareholder approval of these items.
- The mandate of the Compensation Committee should be reviewed. Companies will want to consider whether its Compensation Committee should be delegated responsibility for making recommendations on these matters and preparing the accompanying disclosure.
- The SEC’s fall 2009 statement about futures comments remains in effect. The November 2009 statement by the SEC that comments on executive compensation disclosure will require amendment of past filings, rather than addressed in future filings, remains in effect.
- Don’t forget the items that were new for 2010. Companies will want to ensure they fully adopted the items new for last year’s proxy season, including disclosure, if required, regarding compensation policies and risk; reporting of equity awards; enhanced disclosure about directors and director nominees; board leadership disclosure; and disclosure regarding fees paid to compensation consultants.