Federally supported financial firms have begun filing their preliminary proxy materials that include an advisory vote on executive pay, as required by the U.S. economic stimulus legislation.

It appears that many financial companies, especially those with April meeting dates, had to work quickly to revise their proxy materials to comply with this new mandate. The “say on pay” requirement was added to the American Recovery and Reinvestment Act of 2009 late in the legislative process, and many investors and corporate advisers originally assumed the first votes would be in 2010, after the Securities and Exchange Commission prepared a rule on the topic. However, the SEC, after prodding from U.S. Sen. Christopher Dodd of Connecticut, confirmed Feb. 26 that Troubled Asset Relief Program (TARP) participants must hold pay votes in 2009 if they file their final proxy statements after Feb. 17. Governance observers expect that at least 280 firms will hold advisory votes this year, up from the six issuers that voluntarily did so in 2008.

So far, the SEC has not issued specific guidance on the language that TARP firms should include in their management proposals. In recognition of the tight deadlines faced by issuers with April meetings, the agency said companies may ask the SEC to expedite the 10-day review period (normally required after a preliminary proxy filing) before definitive proxy materials may be filed, so annual meetings won't have to be postponed.

Based on early proxy filings, it appears that most TARP companies are preparing agenda items that refer to the stimulus bill and closely track the legislation’s requirements. In most cases, the firms are asking investors to approve the compensation paid to the named executive officers, as described in the “Compensation Discussion and Analysis” (CD&A) section of the proxy statement and the accompanying tabular disclosures.

Given the time constraints, most of the early filers have not included a detailed justification for their compensation practices. Many of the agenda items are rather brief; examples include United Bancorp (203 words), M&T Bank (223 words), and Citizens & Northern (285 words). In its agenda item, Olympia, Wash.-based Heritage Financial provides a general defense of its pay policies: “We believe that our compensation policies and procedures are reasonable in comparison both to our Peer Group and to our relatively strong performance of the Company during 2008. We also believe that our compensation program is effective and appropriate.”

Bank of America is one of the few firms so far to highlight specific compensation practices. In its 474-word ballot item, the Charlotte-based bank points to its bonus recoupment policy, its “stringent” stock ownership restrictions, and the fact that no executive officers received any year-end cash or equity bonuses.

Marshall & Ilsley discusses in its 760-word agenda item how it seeks “to establish a direct correlation between the annual incentives awarded to [top executives] and the financial performance of the company. The Wisconsin-based firm explains that it made no incentive payments in 2008 to the named executive officers and that their total annual cash compensation decreased by 26 percent from 2007.

Mark Borges, a compensation consultant with Compensia who has reviewed several dozen early filings, noted that 26 firms closely followed the provisions in the stimulus bill, while 10 phrased their agenda items more broadly and included language like that used by Aflac, which held the first U.S. advisory vote in May 2008. During a March 4 panel hosted by TheCorporateCounsel.net, Borges said he expects to see more “sophisticated” proposals in the future that point to certain parts of the CD&A. Some of those agenda items may resemble the management proposals from Verizon Communications, Motorola, and other non-TARP firms that are voluntarily holding their first advisory votes this season, he said.

So far, all of the early filers note that the compensation vote is non-binding. Most proxy statements (21) say the compensation committee will consider the results of the shareholder vote, nine say the committee may do so, and five are silent on that issue, Borges said.

Some preliminary proxy statements at TARP firms include both a management proposal and a shareholder resolution on the issue. On Feb. 27, Bank of America asked the SEC for permission to exclude a shareholder proposal from retail investor Kenneth Steiner, although the bank had missed the regular deadline for filing no-action requests. Tim Smith of Walden Asset Management, a leading pay-vote advocate, said the company should have asked Steiner to withdraw his proposal before wasting shareholder money to submit a no-action request. Most pay-vote proponents are withdrawing their proposals at TARP firms to avoid any confusion. So far, investors have negotiated withdrawal agreements with nine of the 14 TARP where advisory vote resolutions were filed, Smith said.