The Arrival of Say on Pay (Part 1)

Say on Pay is coming and it looks likely to alter the compensation debate. Some companies voluntarily put in place a say on pay provision (Aflac was the first).  Others were required under TARP.  See Rule 14a-20, 17 CFR 240.14a-20. 

But financial reform will make say on pay much more comprehensive.  The Dodd bill contains a provision that would amend the Exchange Act to add Section 14A.  As Section 951 of the Act provides: 

• (a) SEPARATE RESOLUTION REQUIRED.—Any proxy or consent or authorization for an annual or other meeting of the shareholders occurring after the end of the 6-month period beginning on the date of enactment of this section, for which the proxy solicitation rules of the Commission require compensation disclosure, shall include a separate resolution subject to shareholder vote to approve the compensation of executives, as disclosed pursuant to section 229.402 of title 17, Code of Federal Regulations, or any successor thereto.

• (b) RULE OF CONSTRUCTION.—The shareholder vote referred to in subsection (a) shall not be binding on the issuer or the board of directors of an issuer, and may not be construed—(1) as overruling a decision by such issuer or board of directors; (2) to create or imply any change to the fiduciary duties of such issuer or board of directors; (3) to create or imply any additional fiduciary duties for such issuer or board of directors; or (4) to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.’’

The provision is triggered by a proxy solicitation.  Neither the securities laws nor state law require a poxy solicitation.  (The securities laws do require distribution of an information statement in the event that a company does not solicit proxies).  The practice is instead required by the rules of the stock exchanges.  Thus, the say on pay provision would apply to any public company that is on an exchange or chooses voluntarily to solicit proxies.  This will likely encompass most public companies.

What will happen when this provision is in place?  Events earlier this week suggest that shareholders will take full advantage of the opportunity to let management know what they think of the pay package for top officers.  We will discuss these events in the next posts.