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January 27, 2011
SEC Adopts Rules for Say on Pay
    by Robert Kropp

In accordance with the Dodd-Frank financial reform bill, the Securities and Exchange Commission issues rules on executive compensation and golden parachutes.

This week, the Securities and Exchange Commission (SEC) replied to the mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act by adopting rules addressing shareowner approval of executive compensation and golden parachute arrangements.

The rules passed the Commission by a 3-2 vote.

Sustainable investors have long argued that excessive compensation encourages an unsustainable emphasis on short-term profits and an appetite for risk-taking that are now seen as contributing factors to the financial crisis. In May, 2010, when the Senate passed Dodd-Frank, Lisa Woll, CEO of the Social Investment Forum (SIF), said, "The most recent financial crisis highlighted for all Americans the urgent need to instill greater discipline among corporate boards and in financial markets…say on pay will help address these failures and strengthen America's financial markets."

The rules adopted by the SEC require public companies that are subject to the federal proxy rules to provide shareowners with an advisory vote on executive compensation at least every three years. Companies must also provide shareowners with a vote on the desired frequency of executive compensation votes every six years.

Shareowners must also be provided with an advisory vote on golden parachute arrangements associated with merger transactions.

Larger public companies must provide shareowners with a vote on executive compensation at their first annual general meeting held on or after Jan. 21, 2011. Companies with a market capitalization of less than $75 million will be permitted to delay adoption of the rules until annual meetings occurring on or after Jan. 21, 2013.

The financial crisis led to a marked increase in the number of shareowner proposals addressing executive compensation, and, in many cases, a higher vote count in support of such proposals. In 2010, for instance, a majority of shareowners voted to adopt a say-on-pay proposal at Chesapeake Energy, while at Motorola, a management proposal to ratify executive compensation received only 45.7% support.

However, as a report published in December by the Council of Institutional Investors (CII) pointed out, none of the six major post-crisis Wall Street banks "has addressed adequately the importance of tying compensation to long-term value growth."

Furthermore, the report continued, "More vigorous federal oversight of Wall Street does not appear to have changed compensation on the Street for the better."


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