SEC Adopts Say-on-Pay for Shareholders

(January 25, 2011) — The Securities and Exchange Commission (SEC) has adopted rules that would give shareholders at public companies a nonbinding vote on executive compensation packages.

The decision by US regulators reflects an effort to give shareholders greater authority over executive pay following the financial crisis, when many investors expressed public outcry over extravagant pay practices. Investor advocates, pension funds, and shareholder groups have pushed for such a change.

Under the agency’s authority granted under the Dodd-Frank Act, the regulator’s commissioners voted 3-2 to enact a say-on-pay measure, making compensation plans subject to nonbinding shareholder votes as often as once a year.

The SEC amended the rule proposed in October to “specify that a say-on-pay vote is required at least once every three years, beginning with the first annual shareholders’ meeting taking place on or after January 21.” According to the SEC, companies also are required to hold a “frequency” vote at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote. Furthermore, the ruling will improve disclosure on so-called golden parachute payments for executives, which they get when their companies are acquired by others in mergers.

The SEC could formally adopt the new rules following the 30-day comment period.

The urging by institutional investors to improve compensation structures is reflected in a report in November 2010 by the Council of Institutional Investors, representing about 130 pension funds, that asserted that pay practices at major Wall Street firms fueled excessive risk-taking by executives.

The report, by Paul Hodgson, senior research associate at The Corporate Library, covered Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Wells Fargo & Co. It found that financial firms linked too many of their pay practices to short-term results. Additionally, the survey asserted that many of these firms inflated salaries to offset the impact of regulatory controls put in place after the 2008 market meltdown.

“The global financial crisis that erupted in 2008 cast a harsh light on executive compensation at many Wall Street banks,” the report, titled “Wall Street Pay: Size, Structure and Significance for Shareowners,” stated. “Legions of executives pocketed large compensation packages or departed with generous severance payments even as their banks descended into bankruptcy or were bailed out by the federal government.” The report concluded that the size and structure of these pay packages offered perverse incentives that helped drive excessively risky decisions that pushed financial markets to the brink of disaster.