It’s time to put proxy disclosure drafting and shareholder outreach efforts into overdrive: the Securities and Exchange Commission’s long-awaited rule proposals requiring shareholder votes on executive compensation and severance packages have arrived.

The proposals from the SEC, mandated by the Dodd-Frank Act and out for comment until Nov. 18, are fairly straightforward, experts say. Indeed, many companies already offer some sort of shareholder advisory vote on pay; the new proposals simply require them for all public companies. “There shouldn’t be a lot of teeth-gnashing” with respect to execution, says David Martin, co-head of the securities practice group at Covington & Burling.

As it stands now, companies won’t have to file preliminary proxy statements, and the say-on-pay proposal isn’t required to be in any particular place in the proxy or to include specific wording. Instead, the big worry companies have is whether their compensation plans will pass muster with their investors. “No one wants to be embarrassed by a negative vote,” Martin says.

Occidental Petroleum suffered that embarrassment last May, when shareholders gave a thumbs-down to the compensation package for CEO Ray Irani. Sure enough, on Oct. 14, Occidental’s board announced revisions to its executive pay plans “that will substantially reduce the company’s overall compensation levels to be more in line with its peers.”

For that reason, companies are paying more attention than ever to shareholder relations and communications, especially those worried about a negative vote and the heap of unwanted attention that would come with it.

“This will be a very fertile field for governance activists and the media,” Martin says.

Under the SEC proposals, companies must provide shareholders with three advisory votes: one on executive compensation, another on the desired frequency of those votes, and a third on “golden parachute” severance packages in connection with mergers.

As mandated by the Dodd-Frank Act, say-on-pay votes are required at least once every three years beginning with the first annual shareholders’ meeting on or after Jan. 21, 2011, whether or not the SEC rules are finalized by then.

Companies must also allow shareholders to cast a non-binding “frequency” vote at least once every six years on how often they want a say-on-pay vote: every one, two, or three years.

What to Do Now

Now that companies have a good idea of what the rules will look like, they are busy refining their proxy disclosure to explain to investors why their pay programs are appropriate. Excessive perks or tax gross-ups, overly generous severance arrangements, and single-trigger change-in-control arrangements could be contentious items and should be examined since they could be the impetus for a negative vote.

Borges

Companies that have taken flack from investors or proxy advisory firms over their pay programs, or that have witnessed high votes against comp committee members in the past, are at the greatest risk for negative votes. Their first order of business is to decide whether they’re going to do anything to improve their chances of getting shareholder support, says Mark Borges, a principal with compensation consulting firm Compensia Inc. “If you have features in your pay programs you already know shareholders don’t like, you need to change them or explain, why despite their objections, those things are important to have,” he says.

Compensation committees, which will be responsible for the pay disclosures, should also be consulted to address any shareholder concerns on pay, Martin says.

Mueller

“This is the year to rewrite your Compensation Discussion & Analysis.”

—Ronald Mueller,

Partner,

Gibson Dunn & Crutcher

Even if they haven’t come under fire for their comp programs, experts say companies should re-examine some of their proxy pay disclosure for 2011. “This is the year to rewrite your Compensation Discussion & Analysis,” says Ronald Mueller, a partner with Gibson Dunn & Crutcher.

Borges agrees. “This is your last great opportunity to revisit your proxy disclosure and decide whether there are ways you want to change it, shorten it, or make it clearer,” he says. Most companies have drafted that disclosure with the SEC in mind. “This year, it should be revised with a company’s shareholder base in mind,” he says.

Capwell

One idea companies ought to consider is an executive summary at the front of their CD&A, says Jeffrey Capwell, head of the executive compensation and employee benefits group at McGuireWoods. Proxies will be coming fast and furiously, he says, and most investors probably won’t read every page. A summary would focus on how the company’s compensation decisions and program structure are tied to its business objectives and its performance. It should also highlight investor-friendly features and any features that are responsive to shareholder concerns.

Mueller says the CD&A should be written with three goals in mind: To provide a good understanding of the company’s compensation program on the first page; to provide investors some detail about the program mechanics and basis for decisions; and to do it in an organized, readable format investors can use.

Companies will also want to prepare by getting a good read on where shareholder sentiment lies on executive pay. Borges also suggests companies look at reports and ratings of their companies by ISS to get an idea of how their programs stack up against what’s viewed as best practice. They should also look at how their directors, particularly comp committee members, have fared in re-elections in recent years as an indicator of shareholder satisfaction. No company should go into its annual meeting without having a pretty good idea of what the outcome will be,” he says.

Martin

SEC REQUEST FOR COMMENT

The SEC is requesting comment on the following four questions. See below for instructions on where to send answers:

(1) Should we include more specific requirements regarding the manner in which

issuers should present the shareholder vote on executive compensation? For

example, should we designate the specific language to be used and/or require

issuers to frame the shareholder vote to approve executive compensation in the

form of a resolution? If so, what specific language or form of resolution should

be used?

(2) Would it be appropriate to exempt smaller reporting companies from the

shareholder vote to approve executive compensation? Please explain the reasons

why an exemption would, or would not, be appropriate. Would the proposed

amendments be disproportionately burdensome for smaller reporting

companies?

(3) Should we establish compliance dates to phase-in effectiveness of our proposed

rules? Are there other transition issues that our rules should address?

(4) Section 14A(a)(1), like Section 111(e) of the EESA, does not specify which

shares are entitled to vote in the shareholder vote to approve executive

compensation, nor does this section direct the Commission to adopt rules

addressing this point. As in our implementation of EESA Section 111(e), we are

not proposing to address this question in our rules. Should our rules

implementing Section 14A(a)(1) address this question? If so, how, and on what

basis?

DATES: Comments should be received on or before November 18, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments:

Use the Commission’s Internet comment form: (http://www.sec.gov/rules/proposed.shtml);

Send an e-mail to rule-comments@sec.gov. Please include File Number S7-31-10 on the subject line; or

Use the Federal Rulemaking Portal (http://www.regulations.gov).

Follow the instructions for submitting comments.

Paper Comments:

Send paper comments in triplicate to:

Elizabeth M. Murphy

Secretary

Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549-1090

All submissions should refer to File Number S7-31-10. This file number should be included

on the subject line if e-mail is used. To help us process and review your comments more

efficiently, please use only one method.

Source

SEC Proposal on Exec Comp (Oct. 18, 2010).

Some companies are using shareholder forums or their company Websites to seek feedback from shareholders on executive compensation and to offer them ways to communicate with the board on pay issues, Martin says.

What’s the Frequency?

Plenty of companies are concerned about the “say on frequency” vote. It’s generally expected that many shareholders will want annual votes, while most companies will want triennial votes. “Companies should have a well thought out position on frequency but shouldn’t get overly distracted by it,” Mueller says. “The main focus should be on your pay policies.”

Under transition guidance in the proposal, companies must offer four choices for the frequency vote (one, two, or three years, or abstain), if they want to keep their discretionary authority to vote unmarked proxies in favor of management. The wrinkle is that proxy processers’ current systems for distributing receiving and counting votes are based on three choice models, typically, ”for,” “against,” and “abstain.”

Issuers will want to check with their proxy distributors and tabulators to see if they’ll be able to accommodate the four vote options for their meeting, and keep an eye on what the SEC does with respect to the issue when it publishes a final rule.

The frequency vote is non-binding, which means companies are free to ignore it—at the risk of angering investors. Compensation experts are advising issuers to think through ahead of time what they’ll do if the result of the shareholder vote on frequency is different than management’s recommendation. They say the best course of action is to get some input on the issue from their largest investors. “Companies would be well advised to talk to their major shareholders and ask what approach they think is reasonable,” says Borges.

Institutional Shareholder Services’ draft policy, now out for comment, supports annual votes, but the proxy advisory firm declined to comment beyond the draft, since it won’t issue final policy updates until late November.

According to the draft, ISS plans to adopt a policy to vote in favor of companies providing for annual SOP proposals, to recommend for an annual vote where companies offers a menu of options, and to recommend against it where a company offers only the option of a biannual or triennial vote.

Durkin

However, some large shareholder groups are already indicating that they are comfortable with a less frequent vote. The United Brotherhood of Carpenters, for example, will continue to push for triennial say-on-pay votes, says Edward Durkin, UBC’s director of corporate affairs. UBC is in the process of evaluating the pay programs of about 100 companies using 2010 proxy data against a set of core principles and practices it will use in say-on-pay voting in 2011.