On January 25, 2011, the Securities and Exchange Commission (the “SEC”), acting on the directive set forth in the Wall Street Reform and Consumer Protection Act (also known as the “Dodd-Frank Act”), released its final rules relating to shareholder approval of executive compensation and “golden parachute” packages. Generally referred to as “say-on-pay,” the final rules implement new Section 14A of the Securities Exchange Act of 1934 (the “Exchange Act”) which requires companies to hold non-binding shareholder advisory votes on the following:

  • the compensation of the company’s executives;
  • the frequency with which such advisory votes are held; and
  • golden parachute compensation paid to “named executive officers” in connection with merger or acquisition transactions.

The new rules also require certain disclosures regarding the effect of shareholder votes on executive compensation and certain disclosures relating to golden parachute payments, and the conditions under which they may be paid. Advisory votes on executive compensation are to be solicited at least once every three calendar years by including in the proxy materials for the company’s annual meeting at which directors are elected (or any other shareholder meeting requiring disclosure of compensation information under SEC rules) a resolution for the shareholders’ approval of the executive compensation described in the proxy materials. The rules do not specify any particular language for the resolution, but do require the company to disclose:

  • that a shareholder vote is being held to approve the executive compensation, as disclosed in the proxy statement or annual report pursuant to Item 402;
  • the general effect of the vote, including that it is non-binding on the company;
  • the frequency with which say-on-pay votes will be held and the year in which the next say-on-pay vote will be held, although this disclosure is not required in the first year.

Companies will also be required to disclose in their compensation discussion and analysis section of the proxy statement whether, and if so, how they have considered the results of the most recent advisory vote in determining compensation policies and decisions and, if so, how that consideration has affected those policies and decisions.

For most companies, the first solicitation of say-on-pay votes must be included in the company’s proxy materials for the first shareholder meeting held after January 21, 2011. Smaller reporting companies with a public float of less than $75 million need not hold such votes until their first annual meeting held after January 21, 2013.

In addition to “say-on-pay,” the new rules require companies to solicit an advisory vote on the frequency (i.e., once every one, two or three years) with which “say-on-pay” voting is to be held. As with say-on-pay, the vote is non-binding, but if the company adopts the frequency standard recommended by a majority of the shareholders, it may exclude shareholder proposals that seek a say-on-pay or say-on-frequency vote. The new rules further provide:

  • a requirement that the company provide four distinct frequency choices on the proxy card: “one year,” “two years,” “three years,” or “abstention from voting,” and that the company may vote uninstructed proxies in accordance with its recommendation if the company complies with certain disclosure provisions of the new rules;
  • a brief explanation of the general affect of the frequency vote, such as whether it is non-binding;
  • except in connection with the intial meeting at which such a vote is taken, a requirement for disclosure of the current frequency of say-on-pay votes and when the next vote will occur; and
  • that the company disclose its decision on the frequency of say-on-pay votes in light of such vote on a Form 8-K, which must be filed within 150 days of the meeting at which the vote took place, and in no event later than 60 days prior to the deadline for submission of shareholder proposals for the next annual meeting.

The “say-on-frequency” vote is to be held at the first shareholder meeting after January 21, 2011 (meetings after January 21, 2013 for smaller reporting companies) and thereafter must be conducted at least once every six years.

Advisory votes on “golden parachute” arrangements offered to named executive officers are to be held in connection with any merger or acquisition transaction for which shareholder approval (via a proxy or consent solicitation) is required, unless such arrangements were properly disclosed and the subject of a previous say-on-pay vote. In addition, the new rules require tabular and narrative disclosure in all such proxy or consent soliciations of, among other things, the aggregate compensation paid or payable to the officers, and the conditions under which such amounts will be paid or payable. Say-on-golden parachute votes and the related disclosure must be included in proxy statements and related filings initially filed after April 25, 2011.

The new rules reflect the continued concerns of the investing public relating to executive compensation. The initial quandary for many companies will be the frequency with which it will offer shareholders the opportunity to “say-on-pay.” Early filings indicate a majority of companies recommending three-year frequency, but some surveys and commentary suggest that a one-year frequency recommendation, perceived to give shareholders a louder “voice” on compensation issues, may prevail. Supporters of less frequent say-on-pay votes point out that many compensation packages are structured to consider long-term, rather than annual performance, and that annual advisory votes will require excessive analysis by shareholders in order to be informed. Monsanto, the first S&P 500 company to release the results of its say-on-frequency vote, disclosed that its shareholders rejected management’s recommendation of a triennial vote in favor of an annual vote. Frequency recommendations and shareholder preferences will become more apparent as the proxy season continues.