The "say-on-pay" rules giving stockholders a voice in
executive compensation are now in place for publicly traded
companies. The rules establish new proxy requirements applicable to
the 2011 proxy season, although for smaller reporting companies,
implementation of certain of the rules has been deferred until
2013. A number of companies have already begun to report the
results of their "say-on-pay" votes.
Say-On-Pay" Rules
Recently, the U.S. Securities and Exchange Commission (the "SEC") adopted final rules implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act"). These rules, commonly referred to as the "say-on-pay rules," provide for stockholder approval of executive compensation and, in certain circumstances, executive "golden parachute" arrangements. Promulgated under new Section 14A of the Securities Exchange Act of 1934, the say-on-pay rules establish three separate, non-binding stockholder advisory votes:
- A vote to approve the compensation of a company's named
executive officers (the "periodic say-on-pay
vote");
- A vote to determine how often—every one, two or three
calendar years—the periodic say-on-pay vote should be
taken (the "frequency vote"); and
- A vote approving any "golden parachute" arrangements granted to a company's named executive officers or an acquiring issuer's named executive officers in connection with a company merger, acquisition or disposition of substantially all company assets.
As noted above, the say-on-pay rules only apply to executive compensation; the compensation of directors is not subject to an advisory stockholder vote.
Public companies must include the initial periodic say-on-pay
vote and the initial frequency vote in their proxy statements for
any annual or other stockholder meeting occurring after January 21,
2011 at which directors will be elected and for which SEC rules
require executive compensation be disclosed. Thereafter,
stockholders will have the right to cast a frequency vote at least
once every six calendar years. To help ease the burden on smaller
reporting companies, the SEC has delayed applicability of the
periodic say-on-pay vote and frequency vote for smaller reporting
companies until the first annual or other meeting of stockholders
occurring on or after January 21, 2013. The SEC has clarified that
smaller reporting companies will not be required to begin providing
Compensation Discussion and Analysis ("CD&A") in
order to comply with these new rules. The SEC also may exempt, by
rule or order, certain smaller reporting companies that it
determines may be disproportionately burdened.
Both larger and smaller reporting companies must begin complying
with new Section 14A(b) governing the disclosure of "golden
parachute" arrangements for proxy statements filed on or after
April 25, 2011.
Each of the three stockholder say-on-pay votes are non-binding on a
company and its board of directors and, according to the SEC, are
not to be construed to alter the fiduciary duties of either the
company or its directors. Additionally, these votes will not limit
the ability of stockholders to make proposals related to executive
compensation for inclusion in proxy materials. However, if a
majority of the votes cast in a frequency vote are cast for a
single frequency, and the company implements a policy in line with
the stockholders' choice, a company can exclude subsequent
stockholder proposals to provide for a periodic say-on-pay vote or
future periodic say-on-pay votes or proposals related to the
frequency of periodic say-on-pay votes. New Item 24 of Schedule 14A
requires a company to disclose in any proxy statement soliciting a
say-on-pay vote the general effect of the vote, such as the fact
that the vote is advisory only, as well as the current frequency of
the periodic say-on-pay vote and when the next such vote will
occur.
The Periodic Say-on-Pay Vote
The rules require that the periodic say-on-pay vote must approve
all compensation disclosed pursuant to Item 402 of Regulation S-K,
including any compensation tables, narrative disclosures, and the
company's CD&A. The SEC has not specified any particular
form or language a company must use in presenting the say-on-pay
vote to its stockholders but has indicated that the language needs
to state that the vote is "to approve the compensation of
executives, as disclosed pursuant to [Item 402 of Regulation S-K]
or any successor thereto". The SEC provided the following
non-exclusive example of a resolution that would satisfy the
applicable requirements:
"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."
Companies will be required to include in their CD&A whether,
and if so how, the results of the prior year's periodic
say-on-pay vote were considered in setting executive compensation.
Smaller reporting companies, since they are not required to prepare
CD&A, will comply with this request by disclosing any material
factors necessary to an understanding of the Summary Compensation
Table.
The Frequency Vote
The SEC has amended proxy requirements to provide that stockholders must be presented with the following four choices when casting a frequency vote:
- To take a periodic say-on-pay vote annually,
- To take a periodic say-on-pay vote once every two calendar years,
- To take a periodic say-on-pay vote once every three calendar years, or
- To abstain from voting on the frequency of the say-on-pay vote.
Companies will be able to vote uninstructed shares if they
include a recommendation for the frequency vote in the proxy
statement, permit abstentions on the proxy card and include
language in bold as to how uninstructed shares will be voted.
Brokers, however, will not be able to vote uninstructed shares. The
Act requires the national securities exchanges to amend their rules
to provide that broker discretionary voting of uninstructed shares
is not permitted for either a periodic say-on-pay vote or a
frequency vote.
Pursuant to current SEC rules, a company must file a Form 8-K
disclosing how its stockholders voted on both the periodic
say-on-pay and frequency vote within four business days following
the stockholder meeting (the "Initial 8-K"). For the
frequency vote, the company will be required to disclose the number
of votes cast for each frequency as well as the number of
abstentions. Once the company has made a final determination as to
the frequency of its periodic say-on-pay vote, the new say-on-pay
rules require the company to file an amendment to the Initial 8-K
disclosing its determination. To allow a company sufficient time to
consider the results of the stockholder vote before making a
decision, the rules provide that this amended Form 8-K should be
filed no later than 150 calendar days after the date of the
stockholder meeting, but in no event later than 60 calendar days
prior to the deadline for submission of Rule 14a-8 stockholder
proposals for the subsequent annual meeting.
Results to Date
According to published data, last year three companies failed to
receive majority stockholder support for their executive
compensation. To date in 2011, two companies, Jacobs Engineering
Group, Inc. and Beazer Homes USA, Inc., have been added to this
list. Both companies received "no" votes from
approximately 54% of shares voted. Around 30 companies have taken a
say-on-pay vote this year.
With respect to the frequency vote, analysts report that companies
are generally recommending a periodic say-on-pay vote be taken once
every three years. Published data reveal that of companies that
have submitted a frequency vote to stockholders, 32% of companies
have recommended an annual vote, 8% of companies have recommended a
biennial vote, 52.7% of companies have recommended a triennial
vote, and 7.3% have not put forth a recommendation.
Stockholders, however, are showing support for an annual say-on-pay
vote. Included among the companies who have recommended a triennial
vote are Monsanto Company, Jacobs Engineering Group, Inc., Costco
Wholesale Corporation and Johnson Controls, Inc.; at all four
companies, the majority of shareholder votes cast were in favor of
the annual option.
Golden Parachutes
Pursuant to Section 14A(b), "golden parachute" arrangements may be voted on by stockholders either as part of a periodic say-on-pay vote or as part of a company's proxy materials soliciting approval for a merger, consolidation, acquisition or disposition of substantially all of the company's assets. Note, however, that if certain golden parachute terms or arrangements are modified after being voted upon as part of a periodic say-on-pay vote, the new arrangements may need to be submitted for another stockholder vote. A company must disclose all agreements, written or unwritten, that it has with its named executive officers or with the named executive officers of the acquiring issuer concerning any type of compensation, whether currently payable, deferred or contingent, that is based upon or otherwise relates to the merger or other transaction. In addition to disclosing the total aggregate of all compensation that may become payable to the named executive officers, the company must also specify the conditions under which such compensation becomes payable, including the execution of non-compete or confidentiality agreements, their duration and provisions regarding waiver or breach, and the duration and timing of payments. New item 402(t) of Regulation S-K specifies the tabular and narrative formats in which this information is to be disclosed.
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