By Anne-Marie Weber

With this year’s annual shareholder meetings largely in the rear-view mirror, one of the issues worth taking a retrospective glance at is the advisory say-on-pay votes required by section 951 of the Dodd-Frank Act. The mandatory requirement of a shareholder vote on a corporate board’s compensation decisions (say-on-pay) has been controversial since its introduction given that, as a general principle of Corporation Law, directors enjoy discretion to set the compensation of company executives.

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As reported in February, the Securities and Exchange Commission (SEC) issued final rules regarding the Dodd-Frank’s so-called say-on-pay provision in January. The new rule requires SEC filing companies to allow shareholders to have an advisory vote on executive compensation as well as an advisory vote on how frequently shareholders will vote on executive compensation. Shareholders now have the choice to vote on executive compensation in one, two, or three-year intervals. Now, two months later, Form 8-K filing statistics show that more companies are endorsing annual voting than earlier in the seasons, and shareholders are showing a clear preference for the annual voting schedule.

To date, 105 of the 173 large-cap S&P 500 firms have filed proxy materials endorsing annual say-on-pay voting, while only 56 have filed materials endorsing the triennial schedule. A mere seven firms have endorsed biennial voting, and five firms have made no recommendation. In addition, of the 417 Russell 3000 firms that have filed, 210 have supported annual voting – a marked increase from earlier Russell 3000 company filings – 182 advocated triennial voting, 13 recommended biennial voting, and 12 made no recommendation.

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On January 25, 2011, the Securities and Exchange Commission (SEC) officially adopted final rules implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This so-called “Say-on-Pay” provision establishes three new shareholder-voting requirements for large companies subject to federal proxy rules.  First, such companies must provide shareholders with a non-binding vote on executive compensation at least once every three years. Second, large companies must give shareholders a non-binding vote establishing the frequency with which they engage in the say-on-pay vote at least once every six years. Finally, shareholders must be given a separately held advisory vote on “golden-parachute” arrangements and understandings in connection with mergers and acquisitions and other transactions, including going-private transactions and third-party tender offers.

For large reporting companies, the non-binding vote on executive compensation as well as the non-binding vote on frequency must be had at the first shareholder meeting after January 21, 2011.  However, smaller reporting companies are not required to hold a say-on-pay or frequency vote until the first shareholder meeting to occur after January 21, 2013.  New regulations regarding golden-parachute votes and disclosures will become effective after April 25, 2011.

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