For small companies, the drama over the SEC's say-on-pay requirement is starting to resemble the commotion over Section 404(b) of Sarbanes-Oxley. The SEC voted to adopt the much-discussed say-on-pay rules last week. As expected, the rules passed--for large companies. Non-accelerated filers weren't spared, as some were hoping. But they ended up with a two-year implementation delay. 

The rules require a say-on-pay vote at least once every three years and a vote on how frequently these votes should occur, generally starting with annual shareholders' meeting taking place in 2011. The rules also require more disclosure in the annual meeting proxy regarding the vote and in the Compensation Discussion and Analysis (CD&A). The rules also call for the results of frequency votes to be disclosed in Form 8-Ks. Regarding Golden Parachutes, much more is required, including all agreements between top executives with both acquiring and target companies. 

The delay for smaller companies, who typically have less resources to comply with new regulations, aims to allow them to observe how the rules operate for large companies with an eye on more efficient implementation. (The Golden Parachute aspects, however, seem to be required.) Over the course of two years, the SEC may evaluate and provide tweaked rules that allow for a more streamlined and less costly implementation. "I believe that this two-year deferral is a balanced and responsible way for the Commission to ensure that its rules do not disproportionately burden small issuers," said SEC Chairman Mary Schapiro. 

The SEC seems to be acknowledging the regulatory experience with 404(b), the detested management attestation of financial controls. Small companies were understandably daunted by the requirement, which proved to be so painful and expensive for large companies. Small companies won a series of delays until finally Dodd-Frank eliminated the requirement completely for small firms. 

They breathed a huge sigh of relief. The truth was that many of them were way behind on their implementation processes. They were essentially gambling that they would be given a permanent exemption--and they won.  

But small companies would be wise not to count on a permanent exemption with regard to say-on-pay. And it's clear that just because there is no say-on-pay doesn't mean shareholders will ignore compensation issues. Companies are still vulnerable to criticism. 

One course of action now would be to voluntarily comply with the law. That may prove unreasonable for some small companies. But to the extent possible, if they can take some baby steps toward compliance, it would be a good idea. More disclosure and a full discussion in filings would be much appreciated and lay the groundwork for full compliance. - Jim