U.S. corporate shareholders gain more (frequent) say-on-pay (Westlaw Business)

February 2, 2011

Lloyd Blankfein (R) of Goldman Sachs and his wife Laura arrive for the state dinner hosted by U.S. President Barack Obama and first lady Michelle Obama for President of China Hu Jintao at the White House in Washington, January 19, 2011. REUTERS/Jonathan ErnstBy Erik Krusch

Feb. 2 (Westlaw Business) – Dodd-Frank and SEC-bolstered shareholders officially have a say on company pay. The SEC recently adopted rules requiring companies to hold say-on-pay, say-on-pay frequency, and golden parachute approval votes. Companies from Deere & Co. and Apple to Johnson Controls and Monsanto’s proxies are drafted, filed and poised to comply with the new rules. Companies and shareholders, however, still have plenty to hash out around the mechanics of executive compensation votes this proxy season.

The SEC’s new rules could help temper CEO pay. Executive compensation is always hot, but like all things, it seems to get hotter when Goldman Sachs is involved. The investment bank just raised CEO Lloyd Blankfein’s salary from $600,000 to $2 million a year. Similarly, Citigroup recently raised CEO Vikram Pandit’s salary from a paltry $1 to $1.75 million per year. These raises typify one of the facets of executive compensation for which legislators and regulators want shareholders to make their voices heard. The SEC has ordered companies to give shareholders a greater voice in executive compensation decisions with say-on-pay, say-on-pay frequency, and golden parachute approval votes.

The SEC’s recently enacted rules are mandated by the Dodd-Frank Act. The rule implements Section 951 of Dodd-Frank, which added Section 14A to the Exchange Act. The statute requires public companies subject to the federal proxy rules to provide their shareholders with non-binding advisory say-on-pay, say-on-pay frequency, and golden parachute approval votes. The rules include a temporary exemption for companies with public stock floats of less than $75 million. The exempted companies not required to conduct say-on-pay and say-on-pay frequency votes until annual meetings occurring on or after Jan. 21, 2013. Even for the companies affected by the rules, these measures are non-binding. The new rules, however, do sever as valuable communication between boards and shareholders. No board wants a public rebuke over its compensation polices.

Say-on-pay votes are no mere rubber stamp. In 2010, Occidental Petroleum, KeyCorp, and Motorola all lost say-on-pay votes. Occidental subsequently announced that CEO Ray Irani would retire and slashed his compensation package. Many additional boards and CEOs could face a defeat at the ballot box given the SEC’s new rules and the corresponding increase in the number of companies holding say-on-pay votes this year. The Dodd-Frank Act and the SEC rules, however, don’t require that say-on-pay be held every year.

Under the new rules, say-on-pay votes must occur at least once every three years and shareholders are entitled to input on how frequently they should vote on the company’s compensation policies. Many boards are recommending annual, biennial, or triennial say-on-pay frequency policies. Apple and Beazer Homes, for example, recommended annual say-on-pay votes. Hormel Foods and Fair Isaac Corporation opted to recommend a biennial executive compensation votes. Emerson Electronic and Monsanto recommended a triennial votes. Interestingly though, some companies, such as Tyco Electronics and Rock-Tenn Company, have not made a say-on-pay frequency recommendation to shareholders.

Early results indicate that shareholders, rather unsurprisingly, are in favor of annual say-on-pay votes. Institution Shareholder Services (ISS), a proxy advisor, has recommended annual say-on-pay votes. Several companies’ shareholders have already flouted the board’s recommendations. Monsanto and Woodward shareholders both voted against the boards’ triennial recommendation. Both companies’ shareholders favored annual say-on-pay votes. At other companies, such as Sally Beauty Holdings, shareholders are voting in favor of the board’s recommended triennial say-on-pay votes. Companies – win, lose, or draw – must hold new say-on-pay frequency votes every six years.

Executive who once floated away on golden parachutes now face the potentially rough landing of shareholder vote. A golden parachute is a lucrative benefit given to employees in the event of a change-in-control or termination. Under the SEC rules, companies are required to provide additional disclosure on golden parachutes in connection with change-in-control transactions. The rules require companies to provide a separate shareholder non-binding, advisory vote on any parachute compensation paid to officers of the target or acquirer. Companies are required to comply with the golden parachute compensation shareholder advisory vote and disclosure requirements in proxy statements and other schedules and forms initially filed on or after April 25, 2011.

Shareholders are getting a lot more say on company pay. Shareholders are basking in new found power with the SEC’s recent passage of rules requiring say-on-pay, say-on-pay frequency, and golden parachute approval votes. While these are non-binding, advisory votes, the rules further enfranchise shareholders. The rules could possibly open more communication between boards and shareholders. Nonetheless, it remains to be seen how boards will respond to “no” votes on executive compensation and disregarded say-on-pay frequency recommendations.

This article was first published by ThomsonReuters’ Westlaw Business Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Westlaw Business Currents online at http://currents.westlawbusiness.com.

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