Say on Pay

J.W. Verret —  19 October 2010

A late Monday press release from the Securities and Exchange Commission announces a rule proposal to implement the say on pay requirements of the Dodd-Frank Act.  I testified before both houses of Congress against the legislative authorizing language in Dodd-Frank that the SEC uses to promulgate the rule.  My testimony before the House Financial Services Committee is available here.  My testimony before the Senate Banking Committee is available here.

The SEC release includes the three central provisions described below:

Shareholder Approval of Executive Compensation

Under the proposed rules implementing the Dodd-Frank Act, companies subject to the federal proxy rules would be required to provide shareholders with an advisory vote on executive compensation….

The SEC’s proposal requires companies to provide disclosure about the say-on-pay vote in the annual meeting proxy statement, including whether the vote is non-binding. The proposal also would require the company to disclose in the Compensation Discussion and Analysis, or CD&A, whether, and if so, how companies have considered the results of previous say-on-pay votes.

Shareholder Approval of the Frequency of Shareholder Votes on Executive Compensation

Under the proposal, companies subject to the federal proxy rules also would be required to allow shareholders to vote on how often they would like to cast a say-on-pay vote, namely: every year, every other year, or once every three years.

Shareholders would be allowed to cast this non-binding “frequency” vote at least once every six years beginning with the first annual shareholders’ meeting taking place on or after Jan. 21, 2011.

The proposals would require companies to provide disclosure about the frequency vote in the annual meeting proxy statement, including whether the vote is non-binding.

Shareholder Approval and Disclosure of Golden Parachute Arrangements

Under the proposal, companies also would be required to provide additional information about the compensation arrangements with executive officers in connection with merger transactions. Disclosures of these “golden parachute” arrangements would be required of all agreements and understandings that the acquiring and target companies have with the named executive officers of both companies.

This “golden parachute” disclosure also would be required in connection with going-private transactions and third-party tender offers, so that the information is available for shareholders no matter the structure of the transaction.

Further, the proposed rules would require companies to provide a shareholder advisory vote to approve certain “golden parachute” compensation arrangements in merger proxy statements.

I am at least partially relieved that Boards seem to be permitted to bifurcate decisions over pay from decisions over golden parachutes based on this brief description of the SEC’s proposal.  Let me take this opportunity to plug my testimony before the Senate Banking Committee hearing that considered the Dodd-Frank provisions that gave the SEC authority to promulgate this rule, in which I urged that if the Committee ultimately decided to support say-on-pay over my objection they at least treat golden parachutes as a distinctly different animal.

I argued for a full exemption for golden parachutes from say-on-pay.  I think golden parachutes are an easy transaction response to the quandry of reconciling Delaware’s position on the poison pill with an appreciation of the benefits of the market for corporate control.  In my view, golden parachutes are delightfully Coasian.

Let’s say you accept the argument that the Delaware cases of the 1980s re-apportioned negotiating authority, outside of the current terms of the corporate contract between shareholders and boards, by permitting poison pills that you think inefficiently inhibited the market for corporate control.  Then you would love the fact that side transactions immediately are invented to encourage executives to rescind the pill for motives beyond pure entrenchment in the form of a negotiated side payment.

Golden parachutes are, indeed, a transaction of which the benefit and the cost should itself be capitalized into share price ex ante because the terms of the payout are clear in advance.  It is also a contractual term that creditors, suppliers, and customers will also more easily take into account in considering how the incentive effects of the contractual provision on the executives will affect their own contractual relationship with the firm and its executives.

Now, for some video.  I appeared on The News Hour with Jim Lehrer to argue against the Dodd-Frank implementing amendment for say-on-pay, and a number of other related executive compensation provisions, just after they passed the House, see here.