SEC Enacts "Say-On-Pay" Rules


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:

  1. To take a periodic say-on-pay vote annually,
  2. To take a periodic say-on-pay vote once every two calendar years,
  3. To take a periodic say-on-pay vote once every three calendar years, or
  4. 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.

For more information regarding the new "say-on-pay" rules, please contact Chase Cole, Ally Harper or any member of Waller Lansden's Securities Practice at 800-487-6380.