Smaller reporting companies are subject to say-on-pay and say-on-frequency votes for the first time this year. In January 2011, the SEC adopted final rules implementing the say-on-pay and say-on-frequency requirements of the Dodd-Frank Act. Under such rules, public companies are required to conduct shareholder advisory votes (i) to approve the compensation of executives, as disclosed pursuant to Item 402 of Regulation S-K, and (ii) to determine how often an issuer will conduct a shareholder advisory vote on executive compensation. Public companies, other than smaller reporting companies, were required to conduct such votes starting with the 2011 proxy season. Smaller reporting companies did not have to conduct such votes until their first annual or other meeting of shareholders occurring on or after January 21, 2013.
In drafting their proxy statements for this year’s annual meeting, smaller reporting companies should look to strategies utilized by other public companies during the past two proxy seasons to avoid a failed say-on-pay vote. For example, public companies have been using their proxy statements, especially their Compensation Discussion and Analysis section, as an opportunity to explain their executive compensation practices to shareholders. Although smaller reporting companies are not required to include a CD&A in their proxy statements, they may want to include disclosure similar to the CD&A or, at a minimum, a summary of executive compensation practices in their proxy statements this year to discuss the company’s compensation philosophy and how executive compensation is aligned with performance.