March 31, 2011

KEEPING CURRENT: SEC Adopts Final Rules Implementing Dodd-Frank "Say on Pay"

Laura Thatcher

On January 25, 2011, in a 3-2 vote, the Securities and Exchange Commission adopted final rules under the Securities Exchange Act of 1934 to implement section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to newly required shareholder advisory votes on executive compensation (the "Say on Pay" vote) and the frequency of Say on Pay votes (the "Say on Frequency" vote). The final rules largely followed the commission's proposed rules issued on October 18, 2010, with a few notable exceptions.

  • Say on Pay Vote: Final Rule 14a-21(a) requires companies, at least once every three years, to provide a separate shareholder advisory vote in proxy statements to approve the compensation of executives, as disclosed in the proxy statement.
  • Say on Frequency Vote: Under final Rule 14a-21(b) companies are required, at least once every six years, to give shareholders an advisory vote as to whether the company's Say on Pay vote will occur every one, two, or three years.

Key Points

Key points about the Say on Pay and Say on Frequency votes include the following, all of which are generally consistent with the commission's proposed rules:

  • No specific language is required for the Say on Pay or Say on Frequency proposals. Some companies have included supporting statements in the proposals while others have taken a more bare bones approach.
  • Both the Say on Pay and Say on Frequency votes are advisory only and, as such, are not binding on the company or its board of directors.
  • The compensation of directors is not subject to the Say on Pay vote.
  • The result of the votes must be disclosed on a Form 8-K within four business days after the shareholders meeting.
  • Companies are required to address in the next compensation discussion and analysis (CD&A) whether and how they have considered the most recent Say on Pay vote and how that consideration has affected their compensation decisions and policies.
  • Brokers are not permitted to vote uninstructed shares in a Say on Pay or Say on Frequency proposal.
  • Institutional investment managers are required to file with the commission their record of voting on Say on Pay and Say on Frequency proposals, including whether the vote was for or against management's recommendation.

Differences of the Final Rules

  • Smaller reporting companies (public float of less than $75 million) will enjoy a two-year temporary exemption from the need to hold a Say on Pay or Say on Frequency vote. This exemption cuts approximately in half the number of companies required to hold the votes in 2011.
  • While no specific language is required for the Say on Pay resolution, the proposal must specify that the vote is on compensation paid to the company's named executive officers. Companies are free to solicit shareholder votes on a range of additional compensation matters to obtain more specific feedback on the company's compensation programs and policies.
  • No later than 150 days after the meeting at which a Say on Frequency vote is held, a company must disclose in a Form 8-K its decision on how frequently the company will hold Say on Pay votes in light of the Say on Frequency vote. The proposed rules had required that this information be filed in the Form 10-Q or 10-K for the quarter in which the vote was held. In response to public comments, the commission provided more time for a company to consider the results of the vote, including consultation with shareholders, before making a decision as to its policy on the frequency of future Say on Pay votes.
  • If any one of the three Say on Pay frequency alternatives (i.e., every one, two, or three years) receives a majority of the votes cast, a company that adopts a policy that is consistent with such majority-approved schedule may exclude any shareholder proposal that relates to future Say on Pay or Say on Frequency votes. The proposed rules had provided this relief for companies going along with the frequency alternative that received a plurality of the votes cast. The commission acknowledged the possibility that no one frequency alternative would receive majority support, in which case, the company would not be able to exclude subsequent shareholder proposals regarding say on pay, even if it adopted the frequency having the support of a plurality of the votes cast.


  • While more than a few companies have submitted their executive pay programs to shareholder voting on a voluntary basis, 2011 is the first year of full-scale mandatory Say on Pay in the United States. All eyes were on the voting results from several annual meetings held during the week of January 24, including Monsanto, Johnson Controls, Costco Wholesale, and Visa. These companies, like many others, took special care to make sure their compensation disclosures delivered a clear presentation, making it as easy as possible for shareholders to understand and evaluate the compensation paid to their leadership teams.
  • Notably, the first month of meetings held under the mandatory Say on Pay regime saw at least two failures: Say on Pay votes at Jacobs Engineering Group and Beazer HomesUSA received 45.5 percent and 46.1 percent approval, respectively. If this percentage failure rate holds, we would see far more Say on Pay failures in 2011 than the three that failed during 2010. However, it is probably too early to extrapolate a trend based on the first month of meetings.
  • A company's board is not required to make any recommendation on the Say on Frequency proposal. If it does, there are several factors to consider, including what its shareholders are likely to prefer:

The 2011 voting guidelines of the leading proxy advisor Institutional Shareholder Services (ISS) indicate that it will uniformly recommend in favor of annual Say on Pay votes.

On January 31, a group of 39 institutional investors including Vanguard, State Street, Fidelity, and Putnam also endorsed an annual Say on Pay vote, but at least a few (including United Brotherhood of Carpenters and Joiners) have signaled they favor a less frequent vote, presumably to spread out the burden of evaluating thousands of proxy statements.

  • Of the approximately 250 companies that had filed proxy statements through February 18, 2011, containing Say on Frequency proposals, a majority (about 57 percent) recommended a triennial Say on Pay, and approximately 32 percent recommended an annual Say on Pay vote. The first month of meetings held under the new rules yielded noteworthy results.

First to report, Monsanto's shareholders approved an annual Say on Pay, against the board-recommended triennial schedule. Monsanto's board went along with the shareholders' preference of an annual vote.

Monsanto has not been alone. Based on reported voting results through mid-February, 54 percent of management recommendations for a triennial or biennial frequency vote have been bucked by shareholders in favor of an annual vote. Those companies whose multi-year recommendations have held tend to be smaller cap companies or have a significant block of "friendly" shareholdings.

The show of overwhelming shareholder support for annual Say on Pay is likely to reverse the early trend of management recommendations for a triennial approach.

Laura Thatcher

Partner, Alston & Bird LLP

Thatcher is a partner in the Atlanta office of Alston & Bird LLP.