On July 31, 2009, the House of Representatives, with the support of the Obama Administration, passed H.R. 3269, the Corporate and Financial Institution Compensation Fairness Act of 2009, proposed legislation that would require all publicly traded companies to seek a nonbinding "say-on-pay" vote of shareholders on executive compensation packages annually and in acquisition transactions.  The bill would also result in the establishment of new independence standards for compensation committees.

The legislation is now before the Senate, which reconvenes this week after the congressional August recess.  Although a similar bill passed the House last year but failed to gain Senate approval, many observers believe that some form of this legislation will be enacted this year.

Say-On-Pay Provisions

Shareholder Vote Would Be Required.  The legislation's say-on-pay provisions would require all public companies to seek a nonbinding vote approving executive compensation in two instances:

  • At Annual Shareholder Meetings.  Any proxy solicited in connection with an annual meeting would need to include a separate advisory vote on executive compensation, as disclosed in the compensation committee report, compensation discussion and analysis, compensation tables and related proxy disclosures currently required by the SEC.
  • In Connection With Acquisition Transactions.  Any proxy soliciting shareholder approval of a public company acquisition would be required to include a separate vote on any compensation to be paid to an executive officer by the company (or the acquiring company, if different) based on, or otherwise relating to, the transaction (sometimes referred to as a golden parachute).  The SEC would be directed to adopt new disclosure requirements related to this compensation.

Vote Would Be Nonbinding.  In either case, the shareholder vote would neither bind the company nor create or imply any additional fiduciary duties of directors.  In addition, the shareholder vote would not limit shareholder proposals related to executive compensation.

Provisions On Compensation Committee Independence

Compensation Committees Would Be Subject to Heightened Independence Standards.  The House bill also would establish new independence standards for public company compensation committees:

  • Independence Affected by Compensation.  As is currently the case for audit committee members, no compensation committee member would be deemed independent if he or she had accepted compensatory fees from the company unrelated to service as a director.  This requirement would augment existing Nasdaq and NYSE independence standards.
  • Committee Advisers Subject to Independence Standards.   Compensation consultants or similar advisers to compensation committees would be required to satisfy independence standards to be developed by the SEC.
  • Committees Allowed to Engage Independent Advisers.  Compensation committees would be required to have express authority to engage and oversee the work of independent compensation consultants, counsel and other advisers, and public companies would be required to provide adequate funding for these services.

  • Disclosure of Independent Advisers Required.  Proxy statements would include specific disclosure about the compensation committee's use of independent compensation consultants.

Legislation Not Expected To Be Effective For 2010 Proxy Season

The House bill would require "say-on-pay" votes at any shareholder meeting held six months after final SEC rules become effective, and the SEC's rulemaking deadline would be six months following the legislation's enactment.  Similarly, the SEC would have nine months following enactment to direct the securities exchanges to adopt listing standards related to the independence of compensation committees.  Based on the proposed SEC deadlines, new rules would likely not be effective for the 2010 proxy season.

Practical Tips

Companies Should Consider Examples of Say-on-Pay Disclosures.  The more than 300 companies participating in the Troubled Asset Relief Program (TARP) were required to seek advisory votes on executive compensation during the 2009 proxy season, and several issuers did so voluntarily as well.  Reviewing the proxy statement disclosure of these companies will aid in planning for potential future mandatory say-on-pay votes. 

Companies Should Focus on Shareholder Communications.  Although say-on-pay votes will not bind compensation committees, failure to win shareholder support could be interpreted as a vote of "no confidence" in a public company's executive compensation program and its leadership.  Say-on-pay increases the visibility of potentially unpopular compensation practices, which underscores the importance of effective communications with shareholders about governance practices.  

In addition to continued review of compensation policies and related disclosures, companies should evaluate their investor relations programs and use of corporate websites and social media (such as blogs) to reach investors.   As described in our September 8, 2008 Update, the SEC has formally recognized the steps many companies have taken to enhance shareholder communications through the use of technology.  A corporate website can be a powerful tool for developing the effective communication strategies and techniques that will be critical to ensuring the success of say-on-pay shareholder votes. 

Companies Should Review Compensation Consultant Arrangements.  Although existing listing standards and SEC rules address compensation committee independence and disclosure about the use of compensation consultants, the proposed legislation could require companies to change existing consulting relationships.  A compensation committee should review whether its current consultant provides broader services to the company, or if other relationships with management could preclude continued service to the committee under independence standards that may be adopted by the SEC.

Additional Information

This update is only intended to provide a general summary of the Corporate and Financial Institution Compensation Fairness Act of 2009.  You can find a copy of the full text of the bill passed by the House of Representatives at http://www.thomas.gov/home/gpoxmlc111/h3269_eh.xml.  You can find discussions of other recent cases, laws, regulations and rule proposals of interest to public companies on our website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.