• SEC Approves "Say on Pay" and "Say When on Pay" Rules
  • January 28, 2011 | Authors: W. Brinkley Dickerson; Eric A. Koontz; Brendan J. Thomas
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • As expected, yesterday the SEC approved rules implementing the “Say on Pay” and “Say When on Pay” provisions of the Dodd-Frank Act. The rules were approved substantially as proposed in October and require non-binding shareholder advisory votes relating to the compensation of executive officers and whether to hold the say-on-pay vote every one, two or three years. Shareholders also will cast an advisory vote with respect to golden parachute compensation arrangements not later than at the time of a relevant transaction. The final rules do deviate from the proposed rules, however, by providing a two-year exemption to smaller reporting companies (public float of less than $75 million) with respect to the say-on-pay and frequency votes. In addition, the final rules require each issuer to disclose its decision, in light of the advisory vote, regarding frequency of future say-on-pay votes in a Form 8-K filing (rather than in a Form 10-Q or Form 10-K as was proposed). The new rules are applicable immediately.

    Issuers are not required to use any specific language or form of resolution to be voted on by the shareholders and have great flexibility in how they include the proposals in their proxy statements.  However, while the votes are only advisory in nature and non-binding on issuers, we believe that they should be taken more seriously than their non-binding nature would suggest.  While probably not in 2011, in due course we expect RiskMetrics (ISS) to react negatively, possibly through recommendations against compensation committee members and even compensation plans, where it views an issuer’s response to a negative vote as inadequate.  Moreover, issuers receiving a negative vote will have to deal more generally with adverse press and shareholder sentiment.

    These risks argue in favor of well-considered and persuasive advocacy in each issuer’s CD&A with respect to the approach to, and amount of, compensation.  More than before, CD&A’s need to lead shareholders to the conclusion that the issuer’s approach to compensation is reasonable under the circumstances.