Preparing for Say-on-Pay
The Dodd-Frank Wall Street Reform and Consumer Protection Act will require listed public companies to hold periodic say-on-pay shareholder votes. Say-on-pay votes are non-binding votes on the compensation of an issuer’s executive officers. Ethan has posted an example of a say-on-pay vote here.
A June 2010 Towers Watson survey found that only 12% of respondents said they are very well prepared for the say-on-pay legislation, while 46% said they were somewhat prepared. Just under one-fourth of respondents (22%) did not know if their companies were ready.
So the question becomes, what can be done to prepare for your first say-on-pay vote? It is a little difficult to come up with an exhaustive list because the SEC has not yet published any proposed rules. However, it should be noted that this provision of the Dodd-Frank Act becomes effective for shareholder meetings on or after January 21, 2011 even if the SEC does not issue any rules. Since the SEC now has a heavy rule-making agenda, and they might not illuminate the issuer universe for some time, it is probably best to start preparation now. As Mark points here, preparation is important because brokers will not be able to vote uninstructed shares on say-on-pay matters.
The first step is to assemble your team. Members should include human resources, investor relations, internal and external counsel, compensation consultants and possibly a proxy solicitor.
The team should then review current executive pay practices. Are there any practices that could be criticized as excess, resulting in a pay-for-performance disconnect or the like? If there are undesirable practices, can steps be taken to eliminate them? The following are some of the items included on Riskmetric’s list of problematic pay practices:
Multi-year guarantees for salary increases, non-performance based bonuses, and equity compensation;
- Including additional years of unworked service that result in significant additional benefits, without sufficient justification, or including long-term equity awards in the pension calculation;
- Perquisites for former and/or retired executives, and extraordinary relocation benefits (including home buyouts) for current executives;
- Change-in-control payments exceeding 3 times base salary and target bonus; change-in-control payments without job loss or substantial diminution of duties; or
- New or materially amended agreements that provide for an excise tax gross-up.
One of the key steps in preparing for say-on-pay will then be to concisely explain to your shareholders your compensation policies and practices. This of course places a premium on making sure the compensation discussion and analysis included in your proxy statement is clear and concise. That should be reviewed and revisited and cleaned-up if necessary.
Where do your key investors stand on compensation issues? It is time to find out. Discuss your pay practices with them or review their voting policies or both.
Finally, as the process unfolds, known and unknown wrinkles will develop so it will be important to stay tuned for new issues. For instance, the Dodd-Frank Act requires issuers to vote on whether the say-on-pay referendum should take place every one, two or three years. Other than beginning to think about what interval you would recommend to your shareholders to adopt for a say-on-pay vote, there are by-law and state law questions that will crop up. How do you know which of the three timing options has been approved if none receive a majority of the votes cast? Hopefully the SEC will issue rules that clarify these matters.
Contact Anne Cotter for more information.