Small and Emerging Growth Companies Will Get First Taste of Say-on-Pay in 2013
In January of 2011, the SEC adopted the rules on which companies would be affected by say-on-frequency and say-on-pay votes under the Dodd-Frank Act. The rules stated that public companies are required to conduct shareholder advisory votes to a) determine how often an issuer will conduct a shareholder advisory vote on executive compensation, and b) approve the compensation of executives, as disclosed pursuant to Item 402 of Regulation S-K. This was directed towards pubic companies, other than smaller reporting companies or "emerging growth companies" or "ECG's", who are required to conduct such votes beginning the 2011 proxy season. Smaller reporting companies did not have to conduct such votes until their first annual or other meeting of shareholders occurring on or after January 21, 2013. Well, it is 2013, and now these companies will have to prepare for this.
The good news is that these EGC companies have the opportunity to review two years of say-on-pay practices. If you find yourself dealing with Say on Pay for the first time, here are a list of suggestions to consider:
- Understand the compensation landmines that get companies in trouble such as disconnected pay and performance, discretionary bonuses, peer group selection, tax gross ups, perquisites, change of control payouts, no stock ownership requirements, etc.;
- Begin a working draft the compensation committee will have adequate time to review and make edits and include outside advisors to ensure best practices and compliance with SEC regulations;
- Use an executive summary and be concise with your story using bullets, simple language, charts and graphs;
- Communicate with your shareholders and be transparent about decisions being made;
- Be specific on your compensation philosophy, explain the decisions thoroughly, and make the link between company performance and pay; and
- Work with outside advisors on the message you are sending and prepare by reviewing the litigation cases of last year that arose from say-on-pay issues.