Say on Pay

Mandatory advisory votes on executive compensation, often referred to as “say-on-pay votes,” have been an integral part of the public company corporate governance and disclosure landscape since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The say-on-pay vote has been credited with ushering in a period of active engagement between companies and shareholders on a wide range of executive compensation and corporate governance matters.

The Dodd-Frank Act Requirements

Section 951 of the Dodd-Frank Act, which added Section 14A to the Securities Exchange Act of 1934 (Exchange Act), requires certain public companies to include a resolution in their proxy statements (at least once every three years) asking that shareholders approve, in a nonbinding vote — referred to as the “say-on-pay vote” — the compensation of the named executive officers, as disclosed under Item 402 of Regulation S-K. A separate resolution is also required (at least once every six years) to determine whether the say-on-pay vote takes place every one, two, or three years, which is referred to as the “say-on-frequency vote.” Emerging growth companies are exempt from the say-on-pay and say-on-frequency vote requirements.

If golden parachute compensation has not been subject to a say-on-pay vote, then companies must solicit shareholder approval of golden parachute compensation through a separate, nonbinding vote — referred to as the “say-on-golden-parachute vote” — at the meeting where the shareholders are asked to approve a merger or similar extraordinary transaction that would trigger payments under the golden parachute provisions. Section 14A also requires that the proxy or consent solicitation material for the transaction disclose, "in a clear and simple form," the golden parachute arrangements or understandings and the aggregate total of all such compensation that may be paid or become payable.

Say-on-Pay Votes — Compliance and Disclosure Considerations

Rule 14a-21(a), which the SEC (U.S. Securities and Exchange Commission) adopted pursuant to Section 14A, indicates that if a solicitation is made by a company, other than an emerging growth company, relating to an annual or another meeting of shareholders at which directors will be elected and for which the SEC’s rules require executive compensation disclosure pursuant to Item 402 of Regulation S-K, then a company must conduct a say-on-pay vote and a say-on-pay vote must occur thereafter no later than the annual or another meeting of shareholders held in the third calendar year after the immediately preceding vote.

Disclosure Serving as the Basis for the Say-on-Pay Vote

The say-on-pay vote specifically relates to the executive compensation disclosure required to be included in the proxy statement, which generally includes the Compensation Discussion and Analysis section, the compensation tables, and the narrative disclosure on executive compensation. Instruction 1 to Rule 14a-21 provides that the say-on-pay vote does not cover director compensation disclosed pursuant to paragraphs (k) and (r) of Item 402 of Regulation S-K, as well as any disclosure pursuant to Item 402(s) of Regulation S-K about the company’s compensation policies and practices as they relate to risk management and risk-taking incentives; however, if risk considerations are a material aspect of the company’s compensation policies or decisions for named executive officers, then the company must discuss these considerations as part of the Compensation Discussion and Analysis disclosure, which will then be subject to the say-on-pay vote.

The Say-on-Pay Resolution and Presentation on the Form of Proxy

Rule 14a-21(a) does not prescribe a particular form of say-on-pay resolution, but the Instruction to Rule 14a-21(a) provides the following nonexclusive example that would satisfy the requirements of the rule:

RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.

The SEC has indicated that companies should retain the flexibility to craft the resolution language. Over the years, companies have adopted various formulations of a resolution for their say-on-pay vote, including language that is not presented as a resolution. Instruction 3 to Rule 14a-21 provides that a smaller reporting company entitled to scaled disclosure under Item 402(l) of Regulation S-K need not include a Compensation Discussion and Analysis in order to comply with the rule, and that its say-on-pay vote must be to approve the compensation of the named executive officers as disclosed pursuant to Item 402(m) through (q) of Regulation S-K. The language of the resolution should be conformed accordingly.

In Exchange Act Rules Corporation Finance Interpretations (CFIs) Question 169.05, the SEC staff has indicated that it is “permissible for the say-on-pay vote to omit the words, ‘pursuant to Item 402 of Regulation S-K,’ and to replace [those] words with a plain English equivalent, such as ‘pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the compensation discussion and analysis, the compensation tables and any related material disclosed in this proxy statement.’”

With respect to the language regarding the say-on-pay vote that is included in the form of proxy and voting instruction form, Exchange Act Rules CFIs Question 169.07 indicates that a company’s proxy card and voting instruction form should not describe the advisory vote to approve executive compensation with the language “to hold an advisory vote on executive compensation” and should rather use formulations such as “to approve the company’s executive compensation”; “advisory approval of the company’s executive compensation”; “advisory resolution to approve executive compensation”; and “advisory vote to approve named executive officer compensation.”

Say-on-Frequency Votes — Compliance and Disclosure Considerations

Rule 14a-21(b) specifies that if a solicitation is made by a company, other than an emerging growth company, relating to an annual or another meeting of shareholders at which directors will be elected, and for which the SEC’s rules require executive compensation disclosure pursuant to Item 402 of Regulation S-K, then that company must conduct a say-on-frequency vote for its first annual or another meeting of shareholders occurring on or after January 21, 2011 (or on or after January 21, 2013 in the case of a smaller reporting company), and such say-on-frequency vote must occur thereafter no later than the annual or another meeting of shareholders held in the sixth calendar year after the immediately preceding say-on-frequency vote. A company can hold a say-on-frequency vote more frequently than every six years if it elects to do so.

Pursuant to Rule 14a-21(b), the say-on-frequency resolution must ask shareholders to indicate whether future say-on-pay votes should occur every one, two, or three years. In accordance with Rule 14a-4, a company’s form of proxy should include the options of whether the shareholders should vote every one, two, or three years or abstain from voting on the say-on-frequency resolution.

Rule 14a-21(b) does not require companies to use a specific form of resolution, and unlike the say-on-pay vote requirement in Rule 14a-21(a), the SEC does not provide a nonexclusive example of a say-on-frequency resolution. In Exchange Act Rules CFIs Question 169.04, the staff indicates that the say-on-frequency vote need not be set forth as a resolution; however, the staff has warned that the say-on-frequency vote must clearly indicate that shareholders can vote on the options of every one, two, or three years (or abstain from voting), rather than just following the recommendation of management. The staff also indicates in Exchange Act Rules CFIs Question 169.06 that it is “permissible for the say-on-frequency vote to include the words ‘every year, every other year, or every three years, or abstain’ in lieu of ‘every 1, 2, or 3 years, or abstain.’”

Additional Requirements

No Preliminary Proxy Statement Required

Exchange Act Rule 14a-6(a) specifies that any shareholder advisory votes on executive compensation, including the say-on-pay or say-on-frequency votes, do not trigger the requirement to file a preliminary proxy statement with the SEC. This language also contemplates an advisory vote on executive compensation that is not required by Section 14A of the Exchange Act.

Disclosure Requirements

Proxy Statement Disclosure

Item 24 to Schedule 14A requires disclosure, in the proxy statement in which the company is providing a say-on-pay, say-on-frequency, or say-on-golden-parachute vote, that the company is providing such vote as required pursuant to Section 14A of the Exchange Act. Further, the company must explain the general effect of such a vote, such as that the vote is nonbinding. Companies also must disclose, when applicable, the current frequency of say-on-pay votes and when the next vote will occur.

Compensation Discussion and Analysis Disclosure

Item 402(b)(1) of Regulation S-K requires a company to address whether and, if so, (i) how the company has considered the results of the most recent shareholder advisory vote on executive compensation in determining compensation policies and decisions and (ii) how that consideration has affected the company’s compensation decisions and policies in its Compensation Discussion and Analysis disclosure.

Item 5.07 Form 8-K

Item 5.07 of Form 8-K specifies that a company must disclose its decision as to how frequently the issuer will conduct say-on-pay votes following each say-on-frequency vote. If a company does not disclose the company’s frequency determination in its initial Item 5.07 of Form 8-K, then the company must file an amendment to its prior Form 8-K filing (or filings) that disclose the preliminary and final results of the say-on-frequency vote. The Form 8-K amendment is due no later than 150 calendar days after the date of the end of the annual meeting in which the say-on-frequency vote occurred but in no event later than 60 calendar days prior to the deadline for the submission of shareholder proposals as disclosed in the proxy materials for the meeting at which the say-on-frequency vote occurred. A company must disclose the number of votes cast for each of the choices of every one, two, or three years, as well as the number of abstentions in Item 5.07 of Form 8-K.

Shareholder Proposals

The note to paragraph and (i)(10) of Exchange Act Rule 14a-8 permits the exclusion of a shareholder proposal as “substantially implemented” if that proposal would provide for a say-on-pay vote, seek future say-on-pay votes, or relate to the frequency of say-on-pay votes. Such shareholder proposals may be excluded if, in the most recent say-on-frequency vote, a single frequency received a majority of the votes cast and the issuer “adopted a policy on the frequency of say-on-pay votes that is consistent with [that] choice.” The SEC has indicated that this note will also apply to shareholder proposals seeking an advisory vote with substantially the same scope as the say-on-pay vote, not just a Section 14A-compliant say-on-pay or say-on-frequency proposal.

Say-on-Golden-Parachute Votes — Compliance and Disclosure Considerations

Rule 14a-21(c) specifies that, if a solicitation is made by a company, other than an emerging growth company, for a meeting of shareholders at which the shareholders are asked to approve an acquisition, a merger, a consolidation, or a proposed sale or another disposition of all or substantially all of the assets of the issuer, then the company must provide a separate shareholder vote to approve any agreements or understandings and compensation disclosed pursuant to Item 402(t) of Regulation S-K. If such agreements or understandings have been subject to a shareholder advisory vote under Rule 14a-21(a), then a separate shareholder vote is not required. Consistent with Exchange Act Section 14A(b), any agreements or understandings between an acquiring company and the named executive officers of the company, in which the company is not the acquiring company, are not required to be subjected to the separate shareholder advisory vote. Emerging growth companies are exempt from the say-on-golden-parachute vote requirement.

The golden parachute disclosure required pursuant to Item 402(t) of Regulation S-K must be presented in a proxy statement for shareholder approval of a merger, sale of a company’s assets, or similar transaction. This disclosure is only required in annual meeting proxy statements when a company is seeking to rely on the exception from a separate merger-related shareholder vote by including the Item 402(t) disclosure in the annual meeting proxy statement soliciting a say-on-pay vote. For each named executive officer, the contemplated disclosure includes a tabular presentation of (i) cash severance payments; (ii) the value of equity awards that are accelerated or cashed out; (iii) pension and nonqualified deferred compensation enhancements; (iv) perquisites and other personal benefits; (v) tax reimbursements; (vi) any additional compensation that is not included in any other column; and (vii) the total of all amounts reported for each named executive officer.

The tabular presentation must include any type of compensation, whether present, deferred, or contingent, that is based on or relates to an acquisition, a merger, a consolidation, a sale, or another disposition of all or substantially all of the assets. In a footnote to the tabular presentation, companies must identify any amounts attributable to “single-trigger” and “double-trigger” arrangements. Item 402(t) of Regulation S-K also requires a description of any material conditions or obligations applicable to the receipt of payment, including, but not limited to, noncompete, non-solicitation, non-disparagement, or confidentiality agreements; their durations; and provisions regarding waiver or breach. Disclosure of the specific circumstances that would trigger payment — whether the payments would be lump sum or annual, their duration, and who would provide them, as well as other material factors regarding each agreement — is also required. Separate disclosure or quantification with respect to compensation disclosed in the Pension Benefits Table and Nonqualified Deferred Compensation Table (unless such benefits are enhanced in connection with the transaction), previously vested equity awards, and compensation from bona fide post-transaction employment agreements entered into in connection with the merger or acquisition is not required.

Additional forms, schedules, and disclosure requirements address golden parachute compensation, such as Schedule 14A, Schedule 14C, forms S-4 and F-4, Schedule 14D-9, Schedule 13E-3, and Item 1011 of Regulation M-A. Schedule TO (the SEC’s tender offer disclosure schedule) provides that Item 402(t) disclosure is not required in a third-party bidder’s tender offer statement, provided that the subject transaction is not also a Rule 13e-3 going private transaction. Companies filing solicitation or recommendation statements on Schedule 14D-9 in connection with third-party tender offers are also obligated to provide the disclosure required by Item 402(t) of Regulation S-K.

Say-on-Pay in Practice

The adoption of a mandatory say-on-pay vote requirement in the United States represented a significant corporate governance development for public companies. The advent of say-on-pay votes has significantly shaped the disclosure and engagement practices of public companies over the course of the past 15 years.

The mandatory say-on-pay vote required by the Dodd-Frank Act has served as a catalyst for active engagement between companies and institutional shareholders on a wide range of executive compensation and corporate governance matters. In the years since the say-on-pay requirement was adopted, companies have explored the best approaches for effective engagement and improved their disclosures regarding executive compensation matters. In the time since say-on-pay votes were first mandated, there has generally been a high level of shareholder support for say-on-pay votes.

Telling the Compensation Story for Say-on-Pay

A central aspect of the say-on-pay engagement between companies and shareholders is the disclosure that companies provide in proxy statements regarding executive compensation. The focus on obtaining support for say-on-pay votes has prompted companies to emphasize the relationship between pay and performance in executive compensation programs when describing such programs in the Compensation Discussion and Analysis section and other executive compensation disclosure in the proxy statement. In this regard, some companies have used alternative pay measures, such as “realized pay” and “realizable pay,” as a means of addressing the pay-for-performance discussion in the Compensation Discussion and Analysis disclosure or in supplemental soliciting material. The say-on-pay vote has also prompted some companies to revisit the presentation of executive compensation information in their proxy statements, including the presentation of an “executive summary” or overview section for the Compensation Discussion and Analysis disclosure, which serves to highlight a company’s financial and business results and describes how those results have influenced executive compensation decisions. Companies may also highlight important compensation actions taken during the last completed fiscal year, as well as significant compensation policies and practices implemented or revised that demonstrate the company’s commitment to linking pay with performance. Companies have also used graphic presentations in their executive compensation disclosures to demonstrate the relationship between pay and performance.

Say-on-Pay Engagement Practices

Many issuers elect to conduct one-on-one engagement meetings with institutional investors in advance of filing their proxy statement. These meetings are often intended to be informational, and they do not involve actively soliciting any vote on expected proposals for the annual meeting. These types of meetings usually involve the discussion of publicly available corporate governance and executive compensation information with participants, while avoiding discussion of material nonpublic information about a company’s performance or any particular plans for corporate governance or executive compensation changes. The proxy advisory firms consider a company’s engagement efforts when determining their recommendation for a say-on-pay vote, particularly in situations in which the company did not receive strong support for say-on-pay at the prior annual meeting. In some cases, companies may determine that it is necessary to publish additional soliciting material after the proxy statement is filed; the additional soliciting material is filed using the submission type “DEFA14A” (the official filing type for definitive additional proxy materials) on the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) filing system. This may reflect engagement on topics with proxy advisory firms and shareholders during the period between the mailing of the proxy statement and the annual meeting.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.