Archive June 2010

Dodd-Frank Act’s Executive Compensation Provisions

I put together a short presentation that outlines the executive compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (below).

Generally, the executive compensation provisions apply to all public companies. However, there is at least one that only applies to covered financial institutions (the one subjecting such companies to enhanced compensation structure reporting and prohibitions).

Having discussed these provisions with a few folks at the Equilar ExecutiveCompensation Summit earlier this month, here are the provisions that will likely be the most burdensome for companies:

  • The requirement to disclose median total annual compensation for all employees (other than the CEO)—total compensation is defined as in the proxy disclosure rules for purposes of the Summary Compensation Table. So, in effect, companies will need to fill out a summary compensation table (or at least determine the amounts that would be disclosed in that table) for every employee! Needless to say, this will be a massive undertaking and cost companies quite a bit to assemble.
  • Developing and implementing a clawback policy—there are many open questions left by Dodd-Frank, so we’ll have to wait to see how the SEC fills things in.  But as it stands now, drafting a clawback policy will be a bit of a challenge given the language of the Act, for example, how would the Act’s language apply to stock options? You couldn’t really be able to determine what the stock price would have been absent the restatement triggering the clawback, so what happens?
  • Say on pay coupled with elimination of broker votes—could mean the first year of mandatory say on pay for all companies becomes a bit of a nail biter while everyone tries to figure out how things will work and how to ensure a sufficient favorable vote on companies’ compensation disclosed in the proxy.
  • For covered institutions, they’ll have to wait a bit longer to see how the appropriate Federal regulators come down on compensation structures.  Given the report of the Federal Reserve on large, complex banking organizations, I think it is safe to assume that these organizations’ compensation designs will be transformed once again.

Effective dates for the provisions are all over the map from immediately effective upon enactment, to having a delay of 6-, 9- or 12-months after enactment. It sounds like the House and Senate have ironed out their differences on this Act and the President is expected to sign it as soon as both houses of Congress pass it, which is expected to occur as soon as July 4th. So some of these provisions (most notably say on pay) most likely will be effective for the 2011 proxy season.

I hope you find the presentation helpful.  If you have any questions or would like to discuss implications, just let me know.

Special Report: Equity Plan Proposal Failures: 2007-2009

The Special Report: Equity Plan Proposal Failures: 2007-2009, Lessons to Consider When Requesting Shares, has been posted on the Special Reports page of this blog under “Reference Materials.”

(Note: you’ll need to have the password to access this page. The password is available to anyone who signs up for Ed’s weekly newsletter in the left-hand side-bar. The password will be automatically e-mailed to you upon sign-up)

In this Special Report, Ed Hauder of Exequity and Reid Pearson of The Altman Group examine the 38 equity plan proposals that failed out of approximately 2,200 total proposals put forward by Russell 3000 companies from 2007 through 2009. The authors detail several lessons for companies to consider when requesting shares, the most significant of which are to ensure that both dilution and burn rate are not excessive.

The Special Report also looks at the success rates of RiskMetrics/ISS’ against vote recommendations for equity plan proposals and finds that they vary, sometimes significantly, based on the industry group. Similarly, the percent of equity plan proposals that failed varies based on industry group. Companies that are considering requesting shareholders to approve additional shares for their equity compensation plans will have a better idea of the challenges they face after reading this Special Report.