Say on Pay: A Practice Pointer


This week, the SEC released a new Compliance and Disclosure Interpretation (“C&DI”) for Exchange Act Rule 14a-21.  This rule sets forth one of the say-on-pay requirements mandated by the Dodd-Frank Act.  It requires issuers to periodically afford shareholders the right to a nonbinding (i.e., advisory) vote on the compensation of the issuer’s named executive officers.

The SEC’s new C&DI addresses how an issuer should describe on its proxy card and voting instruction form the advisory vote to approve executive compensation.  The SEC provided the following examples of acceptable advisory vote descriptions:

  • To approve the company’s executive compensation
  • Advisory approval of the company’s executive compensation
  • Advisory resolution to approve executive compensation
  • Advisory vote to approve named executive officer compensation

The SEC also gave the following example of an advisory vote description that would be inconsistent with Rule 14a-21:

  • To hold an advisory vote on executive compensation

According to the new say-on-pay C&DI, the foregoing example is not acceptable because shareholders could interpret the statement as asking for a vote on whether the issuer should hold an advisory vote.  Instead, the issuer must make clear that the shareholders will be approving, on an advisory basis, the compensation paid to the issuer’s named executive officers.

OUR TAKEAs discussed in a prior post, the say-on-pay rules became effective for most issuers last year.  The obvious practice point from the latest say-on-pay C&DI is that issuers’ proxies must precisely describe what is being asked of shareholders.  Luckily for smaller reporting companies, the say-on-pay rules will not be applicable to them until shareholder meetings held in 2013.  By then, the say-on-pay rules should be somewhat easier to navigate, as the SEC and commentators expose the compliance issues of other filers.

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