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Say on Pay Votes May
Require SEC Template
published on July 26, 2010
Ambiguities in the say-on-pay provisions of the Dodd-Frank Act, calling for
shareholder approval of executive compensation and a second vote on the
frequency with which such approval is sought, are raising calls for the
SEC to clarify both events.
Under Section 951,
the act itself does not mandate that the SEC write new rules for conducting
these votes. It calls for “a separate resolution subject to shareholder vote
to determine whether votes… will occur every 1, 2 or 3 years,” with the vote
on frequency to be held not less than once every six years.
“On its face, the
statute appears to require that shareholders have the right to vote on which
of the three [frequency] alternatives they prefer, not merely to vote for or
against the company’s preference,” says Jim
Barrall, partner at Latham &
But the way the
law is written raises questions about what management can do. “Under basic
corporate law, management can recommend, but leave the choice to
shareholders,” says Mark Poerio,
partner at Paul Hastings.
“Section 951 seems to want investors to have the choice of frequency, but it
doesn’t preclude management from advocating one of the three choices.”
“Boards will have
the ability to present their preference,” says
Sanjay Shirodkar, a former special counsel at the SEC and
currently of counsel at DLA Piper.
The language of
the law, say experts, leaves a loophole that could permit companies to press
for shareholder votes on the frequency of say-on-pay every year, until the
desired result is achieved.
Poerio notes that
this ambiguity might require SEC clarification. “It is unclear whether a
company can use its discretion to hold subsequent frequency votes if it
doesn’t initially get the say-on-pay frequency vote results that it wants,”
he says. The SEC, he points out, might need to develop model text (as it did
with TARP say-on-pay votes) requiring an up-front disclosure that addresses
when the next frequency vote will appear, regardless of the initial outcome.
But other experts
note that the model text itself might not be mandatory. “In TARP, the SEC
did not mandate the language of say-on-pay voting in the proxies,” recalls
Shirodkar. “They just said that companies have to include it.”
Under Title VII of
the American Recovery and Reinvestment Act of 2009, banks rescued by money
infused through the TARP program were compelled to hold annual say-on-pay
directors appear to advocate biennial or triennial votes, that support is
not universal. “One size does not fit all,” explains Shirodkar. “If you go
for annual votes, the board could foster better investor relations.”
At the signing
ceremony making say on pay the law of the land, President
Barack Obama acknowledged: “We... may need to
make adjustments along the way as our financial system adapts to these
Dodd-Frank Reform Prompts New Comp
Even before the SEC issues
new rules clarifying key governance passages of the Dodd-Frank Act,
consultants and lawyers are developing checklists to enable boards to
adjust compensation packages in order to secure a high number of
favorable say-on-pay votes.
“Boards need to take an inventory of compensation policies and ask if
they show a strong link between executive pay and a company’s
performance,” says Sanjay Shirodkar, a former special counsel at the
SEC and currently of counsel at DLA Piper.
Shirodkar’s checklist for compensation committees includes:
• Look more carefully at metrics to make sure they underscore the
importance of linking pay with performance
• Re-examine contracts to be on the lookout for potentially oversize
payouts in severance and change-in-control events
• Look out for triggers on the exercise of tax gross-ups
Compensation consultants have a different perspective.
“We are encouraging our clients to do a strategic mapping of their
large institutional shareholders,” says Irv Becker, national practice
leader at Hay Group. “It can result in a constructive, proactive
discussion. It lets the company know what the hot-button issues are
and lets them adjust compensation plans accordingly.”
Becker adds that while there are many comp elements to consider,
boards have to take a broad view before focusing on specific problem
areas, in particular compensation plans. At that point, he suggests a
hot-button inventory should include:
• Severance programs
• Change-in-control agreements
• Supplemental executive retirement plans
Both lawyers and consultants agree: Boards need to make sure the
language used to present any compensation plan subject to a
shareholder vote is clear.
“If you have practices that register high negatives with investors,
make sure there are strong reasons to keep them,” advises Dan
Ryterband, president of Frederic W. Cook & Co.
Stockholders will be reviewing both the information about executive
compensation and — perhaps more importantly — the company’s
explanation as to the compensation paid to the executives in
considering how they will vote under say on pay.
“You’ll have to rework the CD&A to make sure it is understandable,”
says Shirodkar. “The say-on-pay process will accomplish what the SEC
originally sought under its CD&A disclosure rules three years ago.”
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