Sunday, January 30, 2011

New “Say on Pay” Rules For Public Companies – How Effective Will These Rules Be in Determining Executive Compensation

On January 25, 2011, the Securities and Exchange Commission adopted new rules that apply to public companies, as mandated by Dodd-Frank Act. These rules require that at least once every three years (starting with this year’s annual meetings) shareholders of a public company vote on the executive compensation arrangements, the so called “say-on-pay” vote. Also, shareholders get to vote (at least once every six years) on the frequency of the say-on-pay vote. Further, public companies have to provide additional disclosure regarding executive “golden parachute” arrangements in connection with merger and other transactions. A separate shareholder advisory vote to approve certain golden parachutes will be required starting on April 25, 2011.

Smaller reporting companies (with a public float of less than $75 million) are exempt from conducting the “say-on-pay” and frequency votes until annual meetings occurring on or after January 21, 2013. However, they are not exempt from conducting the shareholder advisory vote on golden parachute compensation.

The votes are only advisory, non-binding. Shareholders get to say “yes” or “no” to the executive compensation, as disclosed pursuant to Rule 402 of Regulation S-K, including the Compensation Discussion & Analysis, but not anything in between, such as how they would like to see the compensation packages changed. However, the rules do not preclude the companies from asking for more specific votes from their shareholders, such as a vote on cash compensation, a separate vote on equity compensation, severance and/or bonus. Also, shareholders can still submit their proposals to the company to be included in the proxy statements that relate to those aspects of compensation arrangements that are not covered by the new rules. The SEC has also required adding disclosure in the proxy statements about whether the company considered results of the most recent vote and if yes, how that has affected the company’s compensation practices. Time and required disclosure will show whether shareholder advisory votes will in fact be effective in getting the board of directors to alter executive compensation packages.

Even though the say-on-pay votes are only advisory, I believe they would be effective in getting the board of directors to change executive compensation policies, if necessary. After all, what public company would want to get a vote of disapproval from their shareholders? A negative vote would affect the company’s share price and raise brows especially from those investors that are looking to invest in companies that receive a vote of confidence from the existing shareholders.

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