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Companies Disclose How They Considered Prior Say-on-Pay Votes In Setting Compensation

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

October 6, 2011

The first few companies have complied with a new proxy statement disclosure requirement relating to past Say-on-Pay votes. Item 402(b)(1)(vii) of Regulation S-K requires companies to disclose “ . . . [w]hether and, if so, how the registrant has considered the results of the most recent shareholder advisory vote on executive compensation . . . in determining compensation policies and decisions and, if so, how that consideration has affected the registrant’s executive compensation decisions and policies.” Mark Borges, in his Proxy Disclosure Blog on (subscription site), recently reported that four companies have complied with this requirement so far, including three TARP-participating financial institutions that have been required to hold Say-on-Pay votes since 2009. The following are excerpts from Compensation Discussion and Analysis in the proxy statements:

Hemispherx Biopharma, Inc.: [After reporting that the stockholders voted not to approve executive compensation, in a close vote.] “The Compensation Committee reviewed the result of the vote on the non-binding resolution causing them to reflect on the various elements of the 2010 executive compensation program. While it remains the goal of the executive compensation program to support long-term value creation, the Committee moved to enhance the program to better align the compensation options with our stockholders’ interests in supporting long-term value creation. Accordingly, two elements have been added to the executive compensation plan . . . .” [The changes were different pricing for reload stock option grants, and inclusion of shares of stock as a component of non-executive compensation.]

City National Bancshares Corporation: [After describing key components of executive compensation.] “The Committee monitors the results of the annual advisory ‘say-on-pay’ proposal and incorporates such results as one of many factors considered in connection with the discharge of its responsibilities, although no such factor is assigned a quantitative weighting. Because a substantial majority (98.1%) of our stockholders approved the compensation program described in our proxy statement in 2010, the Committee did not implement changes to our executive compensation program as a result of the stockholder advisory vote. . . .”

Premier Financial Bancorp, Inc.: “In arriving at its decision on 2010 executive compensation, the Compensation Committee took into account the affirmative shareholder ‘say on pay’ vote at the previous annual meeting of shareholders and continued to apply the same principles in determining the amounts and types of executive compensation. The specific compensation amounts for each of Premier's named executive officers for 2010 reflect the continued improvement in the Company's financial performance. . . .”

And, as Borges puts it, “For brevity, it's difficult to beat the statement in Oak Valley Bancorp's Compensation Discussion and Analysis: ‘The Company considered the Shareholder vote approving the Company's executive compensation for 2010 in making its proposal for 2011.’”

Comment. City National Bancshares and Premier Financial, at least, each had a greater-than-90% positive Say-on-Pay vote the previous year. For companies with similar results, the following year’s proxy disclosure of the impact of the vote should be straightforward. However, for a company that fails to achieve a positive vote, or that receives a narrower majority of positive votes, this disclosure will require a great deal of thought the following year, and the thought process should start shortly after the annual meeting: Should the company change its compensation programs in response to the vote? What changes would send the appropriate signals to our shareholders? Should the company engage with its shareholders to attempt to determine the meaning of the shareholder vote? How will we craft next year’s proxy disclosure about our consideration of the vote? Even before each annual meeting, the company’s internal and external advisors should discuss these issues with the compensation committee, and determine what percentage vote will be considered to “send a signal” to the committee.

In the wake of the current down year in the stock market, next year it may be more difficult for companies to achieve an overwhelmingly positive Say-on-Pay vote, and more companies may well get negative or borderline votes. For these companies, the following year’s proxy language about consideration of the prior Say-on-Pay vote will be subject to a great deal of scrutiny. Given the incidence of “Sue-on-Pay” shareholder lawsuits, as described in this prior post, these disclosures should not be taken lightly, and companies should anticipate the issues and plan accordingly.


I was saddened to hear of the passing yesterday of Apple Inc. founder Steve Jobs. He was an amazing innovator and created a huge amount of prosperity for many in this country. He also created a great deal of enjoyment in a much broader range of people around the globe – enjoyment of great music and the arts on Apple devices, and enjoyment of the elegant design of the products themselves.

In this prior post, I described the disclosure issues created by Jobs’ health problems over the years. Interesting reading, but it’s hard to imagine any other executive whose ongoing health issues would rightfully create so much concern about the company’s well-being. Good luck to Apple, and to all of us. We’ll miss you, Steve.


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