- Say on Pay: A non-binding, advisory shareholder vote on the compensation plans of the top executives of a public company. Starting with annual meetings after Jan. 21, 2011, companies must include a description of the compensation plan in the Compensation Discussion & Analysis (CD&A) section of the proxy statement that serves as a platform for explaining the compensation programs’ logic. The frequency of the vote, which is determined separately by shareholders, cannot be more than triennial.
- Say When on Pay: Again, a non-binding, advisory shareholder vote on the frequency of the Say on Pay vote to be held at least once every six years. Shareholders are to be asked if they favor a vote every year, two years, three years or abstaining.
- Golden Parachutes: A non-binding, advisory shareholder vote on the compensation package of the top executives when a change in control would trigger the severance clause in a executive’s contract with the company. Some of the more controversial elements of some golden parachute plans include excise tax gross-ups, large bonuses, stock options and high severance payments.
Perusing much of what has been written about these type of advisory votes heading into the 2011 proxy season, I came upon four documents that address the many different elements of each while also providing clear guidance on CD&A’s, compensation committees, and executive compensation plans themselves.
Here are the four pieces of recent literature (an article, white paper, a letter and a manual) that I believe are worth reading: (I want to thank Broc Romanek for his February 14 post
at TheCorporateCounsel.net where he mentions the NYSE governance letter as well as the links to the latest SEC staff interpretative guidance on Say on Pay and golden parachutes)
- The 2011 Compensation Committee Guide, Michael J. Segal, David C. Karp, JeanneMarie O’Brien, Adam J. Shapiro, Jeremy L. Goldstein and David E. Kahan of Wachtell, Lipton, Rosen & Katz, January 28, 2011. Summary: This Guide outlines a compensation committee member’s responsibilities, reviews the composition and procedures of the compensation committee, and considers important legal standards and regulations that govern compensation committees and their members. This Guide also recommends specific practices to promote compensation committee effectiveness in designing appropriate compensation programs that advance corporate goals. Although generally geared toward directors who are members of a public company compensation committee, this Guide also is relevant to members of a compensation committee of a private company, especially if the private company may at some point consider accessing the public capital markets. The guide also has a section on Say on Pay as well as updates on clawback provisions and sample compensation committee charters.
- The NYSE's Annual Corporate Governance Letter, Janice O’Neill, Senior Vice President, Corporate Compliance, NYSE, Feb. 10, 2011. Summary: In the annual letter to issuers, the NYSE stresses the issues it feels public companies should be concerned about going into the 2011 proxy season. There is a section in the letter devoted to executive compensation regulations, including new discretionary broker voting. Here is an excerpt from that letter: On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The Act required each national securities exchange to amend its rules to prohibit member organizations from voting shares without specific client instructions in matters related to executive compensation (Section 957 of the Act). The NYSE advised companies on August 4, 2010 that members would be prohibited from voting uninstructed shares at all meetings held after July 21, 2010 if the matter to be voted on relates to executive compensation (SR-NYSE-2010-59). Proposals that are included on proxy statements that involve executive compensation matters, even if they also apply to employees below executive level, will be treated as “May Not Vote” matters, including in those cases where member organizations have previously been allowed to vote uninstructed shares, such as with respect to some plans put to a stockholder vote in order to rely on the performance-based compensation exception to the $1 million annual deduction limit under section 162(m) of the Internal Revenue Code. Similarly, “say on pay”, “say when on pay”, “say on golden parachute” and other executive compensation proposals will be treated as “May Not Vote” matters.
- Getting Ready for Say on Pay (blog post), Practicing Law Institute Securities Law Center, December 16, 2010. Summary: As set forth in the Dodd-Frank Act, beginning in 2011, companies will be required to conduct two shareholder advisory votes on their executive compensation programs at their annual meeting of shareholders. The first vote will be a referendum of their executive compensation programs as disclosed in their proxy materials (“Say on Pay”), while the second vote will solicit input on whether future Say on Pay votes should be held every year, every two years, or every three years. To prepare for these new requirements, companies will need to re-evaluate the form and content of their current executive compensation disclosure to make sure that they’ve made a persuasive case for their current executive compensation policies and decisions. The SEC has now proposed significant new rules to implement these shareholder advisory votes. Although largely procedural in nature, companies will need to understand the framework under which these votes are to be conducted, as well as proposed new disclosure requirements for a third shareholder advisory vote on “golden parachute” arrangements.
- Preparing Your CD&A for Say on Pay, Kristine Meyer and Russell Miller, ClearBridge Compensation Group, January 25, 2011. Summary: ClearBridge comes up with a checklist for some key items to consider as companies prepare their CD&A this proxy season. The CD&A in the proxy statement has taken on significantly greater importance now that shareholders can vote on executive compensation programs (“Say-on-Pay”). Your CD&A will serve as one of the primary tools for communicating with shareholders about your compensation program. With this in mind, the CD&A should be written to clearly explain how your compensation program works, how it supports the company’s strategic objectives, and why shareholders should vote in favor of it.
As public companies and shareholders gear up for the first big wave of SEC-required advisory votes on executive compensation, the frequency of such votes and golden parachute compensation plans in the wake of the Dodd-Frank Act, the search goes on for best practices and advice.
In the past couple of months, there has not been a shortage of both as law firms, compensation consultants, and corporate governance education centers or think tanks. For those of you who need a refresher on the three Say on Pay-related votes this year, here they are: