August 4, 2022
Say-on-Pay: Should Stockholders “Approve” or “Ratify” the Board’s Decision?
We recently received the following member question on our “Q&A Forum” (#1414), which John also noted on TheCorporateCounsel.net:
Should the compensation of NEOs be approved or ratified at an annual stockholders meeting? I believe it should be ratified because the Board previously approved it and now the stockholders are ratifying and approving the board’s action.
This was John’s response:
I think the general practice is to ask shareholders to “approve” the compensation. I think there are a few reasons for that. First, it’s an advisory vote, not one that is intended to have the legal effect associated with ratifying board action under state corporate statutes. Second, the relevant rule uses the term “approve.” Rule 14a-21 requires companies to “include a separate resolution subject to shareholder advisory vote to approve the compensation of its named executive officers, as disclosed pursuant to Item 402 of Regulation S-K.” Finally, the Instruction to Rule 14a-21 includes a non-exclusive sample of an acceptable resolution, which also speaks in terms of shareholders “approving” the compensation. Here’s the text:
“RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby APPROVED.”
When it comes to other say-on-pay questions, don’t forget to consult our “Executive Compensation Disclosure Treatise” – a comprehensive, well-organized resource on executive compensation disclosure that is available online to members of CompensationStandards.com.
– Liz Dunshee