Final rules to implement mandatory say-on-pay votes for all public companies have arrived, with some important changes companies ought to take into account, including a two-year delay for smaller reporting companies.

In a three to two vote at a Jan. 25 open meeting, the Securities and Exchange Commission adopted rules to implement Section 951 of the Dodd-Frank Act, which requires advisory shareholder votes to approve executive compensation, votes on the frequency of SOP votes, and enhanced disclosure of and votes to approve golden parachute agreements in connection with merger transactions.

Under the law, say-on-pay votes are required at least every three years and frequency votes are required at least every six years, beginning with the first annual shareholders' meeting taking place on or after Jan. 21, 2011. The final rule gives smaller reporting companies–generally those with less than $75 million in public float—a temporary exemption from the SOP and frequency votes until their annual meetings on or after Jan. 21, 2013. The delay doesn't apply to the required golden parachute votes.

The delay gives those companies time to prepare for implementation and to observe how the rule operates for other companies, SEC chairman Mary Schapiro said. It also gives the SEC time to consider whether to make adjustments to the rule before it applies to the smaller companies.

In their dissents, Commissioners Kathleen Casey and Troy Paredes argued for an outright exemption for small companies and a break for newly public companies for the first year after their initial public offerings.

Under the final rule, shareholder proposals relating to certain SOP or frequency votes can only be excluded if one of the frequency choices gets a majority of the votes cast and the company adopts a frequency policy in line with that choice. That's a change from the proposing release, which would've allowed companies to exclude such proposals if the company's frequency policy is consistent with the plurality of votes cast on the most recent frequency vote.  

Casey argued that the change could render the frequency vote meaningless, since in some cases one frequency option might not get a majority vote. “Where there is no clear mandate, management is not likely to be influenced by the shareholder vote because there is no way to guard against a shareholder proposal that second-guesses their frequency determination,” she said. That may drive companies to simply adopt the recommendation of proxy advisory firms. “We may have inappropriately placed our thumb on the scale to ensure that companies and shareholders have no real choice on the frequency vote but to do what the proxy advisory services recommend,” Casey said.

The change from plurality to majority of votes cast “gives shareholders a stick,” since companies that don't adopt the frequency option chosen by the investors who vote can be subject to shareholder proposals the following year, says Sanjay Shirodkar, of counsel at DLA Piper and former SEC special counsel.

Casey and Parades wanted the SEC to exempt newly public companies from the vote requirements until after their first annual meeting—an approach the Commission took in adopting rules related to internal controls over financial reporting. The final rules don't provide that break, which means those companies will have to report amounts paid while they were private in their first proxy statement and annual report following an IPO.

Compliance Week will provide subscribers with complete details and analysis of the final rule in its Feb. 1 edition.

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