May 11, 2009
Different Approaches to Say-on-Pay: Broad Retrospective Model
– Colin Diamond, White & Case
Below is the second in a series of blogs exploring the different approaches to say-on-pay that companies can take (here is the first blog on this topic):
Broad Retrospective Model – The Aflac Model
Aflac’s 2008 proxy statement states that Aflac adopted a say-on-pay policy voluntarily following interest expressed by a shareholder in November 2006. The company originally intended to put executive compensation to a shareholder vote in 2009 after three years of comparable compensation data was available. Aflac concluded, however, that the two years of data available in 2008 was sufficient. Accordingly, Aflac put the following resolution to a shareholder vote in that year:
“Resolved, that the shareholders approve the overall executive pay-for-performance compensation policies and procedures employed by the Company, as described in the Compensation Discussion and Analysis and the tabular disclosure regarding named executive officer compensation (together with the accompanying narrative disclosure) in the Proxy Statement.”
This resolution seeks approval of Aflac’s “overall executive pay-for-performance compensation policies and procedures.” Shareholders are referred to two sections of the proxy statement for a description of these policies: first, the Compensation Discussion and Analysis section, and second, the compensation tables, which generally appear after the CD&A.
Aflac’s approach to say-on-pay is broader than the “Narrow Retrospective Model” since it contemplates shareholders voting on both the amount of compensation and the policies underlying it.
As a result, shareholders could vote against the prior year’s executive compensation because they disagree with the policy underlying it rather than the amount (or even if they approve of the amount). This could occur, for example, if shareholders consider the amount of compensation attributable to long-term incentives to be insufficient and believe the company’s compensation policies are overly-focused on short-term returns.
Furthermore, the vote is not limited to the SCT, but covers additional tables included in the proxy statement. This would include the table showing “Grants of Plan-Based Awards” during the prior fiscal year. It might also include those tables that merely summarize “Outstanding Equity Awards at Year End”, “Option Exercises and Vested Stock”, “Pension Benefits” and “Non-Qualified Deferred Compensation.”
There is also a potential pitfall for companies adopting the “Broad Retrospective Model.” CD&A is intended to provide an explanation of a company’s overall compensation policies and practices in order to provide a context for compensation “awarded to, earned by, or paid to” named executive officers.
As a result, the CD&A largely provides the rationale for the prior year’s compensation. However, by its nature, a discussion of overall compensation policies and practices has general application and will often also apply to future compensation decisions. In addition, the SEC has provided comments to the CD&A sections of companies’ proxy statements seeking disclosure of prospective targets for bonuses.
Companies have generally resisted these requests by undertaking to provide prospective targets only to the extent they are relevant to the discussion of historical targets. However, the breadth of the Aflac resolution gives shareholders a vote both on historical amounts and policies, and on prospective policies and targets if they are included in the CD&A.