(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
Under Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, public companies must hold a shareholder advisory vote on executive compensation, starting with the first shareholders meeting on or after January 21, 2011. In June, in anticipation of the adoption of the Dodd-Frank Act, the compensation consulting firm Towers Watson surveyed 251 midsized and large public companies on their preparations for Say-on-Pay and other compensation practices. In July, the firm published its report, titled “With Say on Pay Looming, Companies Move to Further Tighten the Link Between Executive Pay and Performance”.
The Towers Watson survey of these companies found that only 12% of the respondents said they were very well prepared for Say-on-Pay, with 46% saying they were somewhat prepared. When asked what steps they are taking to prepare, 69% of the respondents said they were identifying potential executive pay issues and concerns in advance, with 60% reporting that they are improving their CD&A disclosures to better explain the rationale and appropriateness of their pay programs.
The survey included a question about specific pay practices the respondents had recently changed or are considering changing (Figure 5). The two most commonly mentioned changes were
- requiring double triggers before acceleration of unvested long-term incentive awards (including stock options) upon a change in control (20% recently changed, with another 8% expecting or considering a change), and
- eliminating tax gross-ups for golden parachutes (18% recently changed, with another 15% expecting or considering a change).
However, the respondents reported concerns about taking away existing benefits due to concerns about retaining executives.
Must the Say-on-Pay Vote Necessarily Include Severance Programs?
Several in-house attorneys have recently asked me whether the Say-on-Pay vote must include an evaluation of the company’s executive severance agreements and programs, including change-in-control policies. The answer is yes. Section 951(a)(1) of the Dodd-Frank Act requires that the vote cover “the compensation of executives, as disclosed pursuant to [Item 402 of Regulation S-K].” Since severance and change-in-control arrangements are disclosed in the proxy statement pursuant to Item 402(j), they are necessarily included in the Say-on-Pay vote.
The “Say on Golden Parachutes” advisory vote required under Section 951(a)(2) of the Dodd-Frank Act is a separate requirement, and is not an alternative to covering severance arrangements in a company’s regular Say-on-Pay vote. A Say-on-Parachutes vote only occurs in the context of a special shareholders meeting to approve an M&A transaction. The vote need not be conducted on any change-in-control compensation arrangements previously covered in a Say-on-Pay vote. Therefore, the Say-on-Parachutes vote will only apply to arrangements entered into relatively recently before the M&A deal (i.e., parachute payments negotiated since the last annual meeting).