Earlier this year, the Securities Exchange Commission (SEC) issued final rules (Final Rules) implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which generally provides shareholders of US public companies with the right to cast three types of pay votes: (i) an advisory vote to approve the compensation of the named executive officers (say on pay vote); (ii) an advisory vote on the frequency with which shareholders should be entitled to cast votes on the company’s executive compensation (frequency vote) and (iii) an advisory vote to approve certain payments made in connection with an acquisition, merger or other specified corporate transaction (golden parachute vote).
Public companies in the information technology sector may be affected by the Final Rules and the required advisory votes pursuant to such Final Rules because the rules apply to all US public companies, with specific temporary exemptions for smaller reporting companies (i.e., generally, public companies with less than US$75 million in public equity float). Other than as specifically exempted by the Final Rules, all US public companies are required to hold a say on pay vote and frequency vote at their first shareholder meeting held on or after January 21, 2011 and a golden parachute vote for deal proxies filed on or after April 25, 2011. To view our previous Corporate Governance Update regarding the advisory vote requirements pursuant to the Final Rules, click here.
The frequency vote, and the issue of whether board of directors should recommend annual, biennial or triennial say on pay advisory votes, which arguably garnered the most attention early in the proxy season, are generally settled now. Company recommendations have trended toward annual say on pay advisory votes and such recommendations have overtaken triennial recommendations, due to the voting results of the proxy season which, in approximately 82 percent of reported meeting results, have favored annual say on pay votes.1 Public information technology companies that have not yet filed their proxies should still consider their compensation policies and plans and determine which frequency recommendation is in the best interest of the company. The Final Rules require disclosure of the final decision on how often it would hold a say on pay vote on a Form 8-K. Such filing may be made no later than the earlier of 150 calendar days after the date of the shareholder meeting or 60 calendar days prior to the deadline for the submission of shareholder proposals for the subsequent annual meeting.
The golden parachute advisory vote rules are also now in effect. The Final Rules require golden parachute compensation arrangement disclosures and a golden parachute advisory vote in connection with shareholder meetings to vote on certain change of control transactions. Such advisory vote is not required if the golden parachutes have been subject to a prior say on pay vote. However, if a company modified its golden parachute arrangements after the prior vote, the new arrangements and revised terms must be put up for a new golden parachute vote. To view our previous Corporate Governance Alert regarding the golden parachute requirements pursuant to the Final Rules, click here.
Collective attention has now turned to the say on pay advisory vote results. The Final Rules require companies to discuss in the Compensation Discussion and Analysis (CD&A) of subsequent proxy statements whether they considered the results of the most recent vote and if so, how such consideration affected the companies’ executive compensation decisions and policies. Therefore, the result of the say on pay advisory vote is of particular importance. As of July 21, 2011, of the 2,293 Russell 3000 companies that have reported meeting results, say on pay advisory votes failed to receive at least majority approval at 37 companies, five of which are in the information technology sector. Of the approximately 315 information technology companies that have reported say on pay advisory vote results, the average approval rate is 91 percent.
Of particular note, as of July 21, 2011, Institutional Shareholder Services (ISS), a proxy advisory service, had issued against recommendations for say on pay proposals in approximately 13 percent of Russell 3000 companies that it had assessed. On average, shareholder support for say on pay proposals is 25 percent lower at companies that received an adverse recommendation from ISS. A majority of adverse ISS recommendations with regard to the say on pay proposal is due to pay for performance disconnects.
Accordingly, public information technology companies not only need to make sure that they are complying with the Final Rules, they must also carefully analyze their compensation policies in the face of the say on pay advisory votes and proxy advisory service scrutiny. Such companies should consider including an executive summary at the beginning of the CD&A and list their good corporate governance compensation features toward the beginning of the CD&A. Further, such companies should use the executive summaries to disclose how their executive pay aligns with the companies’ financial performance and how such pay and performance compare to such figures from the com panies’ peers. In the event that companies receive adverse recommendations from proxy advisory services, companies should carefully analyze the recommendations and consider responding to the advisers and possibly discussing the recommendations with shareholders. As of July 21, 2011, at least 107 companies have filed public disclosures with the SEC in response to proxy advisers’ adverse recommendations on a variety of issues, including say on pay proposals due to pay for performance disconnects. Pay for performance issues may be even more important next proxy season with the SEC contemplating adoption of final regulations relating to the Act’s “pay-versus-performance”disclosure requirements as early as January 2012.