Client Newsflash

Treasury Seeks Legislation to Enact Say on Pay and Compensation Committees Changes for All U.S. Public Companies

July 20, 2009

On July 16, 2009, the Treasury Department proposed additional legislation as part of the Investor Protection Act of 2009[1] (the “Act”), titled Subtitle D – Executive Compensation (“Subtitle D”).  The proposed new legislation would require all U.S. public companies to grant shareholders an annual non-binding vote on executive compensation packages (say on pay) and further regulate compensation committees.  The proposals in Subtitle D represent the implementation of the Administration’s previously announced initiatives.[2]


Shareholder votes on executive compensation

If enacted, for meetings held after December 15, 2009:

  • Shareholders will be asked to cast non-binding votes to approve executive compensation as disclosed in proxy statements.
  • Shareholders will be asked to separately approve golden parachute payments in the context of meetings involving an acquisition, merger or sale of assets.  This vote would also be non-binding.

According to Treasury’s announcement, the purpose of the legislation is to encourage accountability and better disclosure.  Treasury refers to the experience in the United Kingdom where say on pay was adopted in 2002, noting that the rules have promoted increased shareholder dialogue and improved compensation practices, including the hiring of independent consultants, detailed compensation guidelines and an increase in the number of meetings of compensation panels.  In describing the U.S. experience, Treasury focused on the recent high support for shareholder proposals advocating for companies to adopt say on pay, contrasted with the few companies that have voluntarily adopted the practice.


Additional independence and other regulation on compensation committees

Compensation committee members would be subject to the same additional independence standards as audit committee members, meaning that they may not:

  • accept a consulting, advisory or other compensatory fee from the company; or
  • be an affiliated person of the company or the company’s subsidiaries.

With respect to the hiring of consultants and advisors:

  • Compensation consultants, legal counsel and other advisors to the committee shall meet independence standards to be promulgated by the SEC.
  • The compensation committee has the authority to retain independent consultants, counsel and other advisors and would be directly responsible for their appointment, compensation and oversight of their work, similar to the audit committee oversight of independent auditors.
  • Companies must disclose whether the compensation committee has retained an independent consultant, and if not, why not.
  • The SEC is required to study the use of compensation consultants and report to Congress in two years.
  • Companies must provide funding for the hiring of independent consultants, counsel and other advisors by the committee.

The proposed legislation delegates to the SEC the responsibility to promulgate rulemaking in both areas. On Friday, Chairman Barney Frank of the House Financial Services Committee circulated a discussion draft based on Subtitle D and previous say on pay legislation that he had sponsored in the House in 2007, and indicated that the Committee will be marking up legislation next week. While both the likelihood of the passage of the Act and the subsequent timing of implementation is unclear, it constitutes yet another example of the increased focus on executive compensation by the Administration and Congress.


1. The Investor Protection Act of 2009 was proposed by Treasury on July 10, 2009 to implement portions of the financial reform proposals contained in the Administration’s recent White Paper.  See the Davis Polk client newsflash entitled Investor Protection Act of 2009, dated July 13, 2009.


If you have questions regarding this newsflash, please call any of the lawyers listed below or your regular Davis Polk contact.

Ning Chiu, Counsel 212 450 4908
Kyoko Takahashi Lin, Partner 212 450 4706
Barbara Nims, Partner 212 450 4591
William M. Kelly, Partner 650 752 2003
     Davis Polk & Wardwell LLP
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