Category Executive Compensation

The Dodd-Frank Act – What Changes Will Impact Executive Compensation?

Unless you’ve been living under a rock or vacationing at the South Pole, you probably know that President Obama signed the Dodd-Frank Act into law on July 21, 2010.  If you’re like most folks, the thought of wading through over 2,200 pages of the Act isn’t all that appealing (especially if all you’re interested in are the changes to executive compensation).  Well, I’ve pulled together several presentations on the topic (all are available under my user account on SlideShare.net), but thought a quick run-down of the big ticket items that will impact executive compensation might be helpful for folks.

  • Say on Pay Vote – nonbinding shareholder vote on the compensation of executives as disclosed in the proxy must be held at least once every 3 years.
  • Say on Pay Vote Frequency Vote – a nonbinding shareholder vote on the frequency of the say on pay vote must be held at least once every 6 years.
  • Vote on Golden Parachutes – a nonbinding shareholder vote on golden parachutes as part of a deal proxy; exception if the arrangement was previously approved by shareholders as part of a say on pay vote (SEC hopefully will offer some further details on how the exception will apply).
  • Independent Compensation Committees – most public companies will be required to have only independent directors on their compensation committees (SEC needs to develop definition of “independence” that will be applied; most commentators believe the SEC will draw heavily from the audit committee independence requirements).
  • Independent Advisers – most public companies’ compensation committees will be required to at least consider the independence of their advisers, e.g., attorneys, compensation consultants, and other advisers.
  • Compensation Committee Authority – mandates that most public company compensation committees must be given authority to retain a compensation consultant and independent legal counsel and other advisers, including fiscal authority.
  • Increased Disclosure About Executive Compensation – requirement for most public companies to disclose more information executive compensation, including:
    • Pay versus performance (hopefully SEC will clarify what will be required);
    • Median annual total compensation of all employees;
    • CEO’s annual total compensation; and
    • Ratio of median annual total compensation of all employees to that of the CEO (will require a lot of extra work for a figure that has questionable utility for shareholders).
  • Clawbacks Required – public companies will be required to implement a clawback policy (broader than the Sarbanes-Oxley Act’s clawback provision; likely will cause implementation issues for companies with existing clawback policies; several unanswered questions that I hope the SEC addresses).
  • Executive and Director Hedging – public companies must disclose their policy with respect to executive and director hedging of company securities.
  • Financial Institutions Subject to Greater Scrutiny – covered financial institutions will be subject to enhanced compensation structure reporting and prohibitions (important for all companies to watch executive compensation developments for financial institutions as these may eventual migrate over to all public companies through shareholder demand or otherwise).
  • Voting by Brokers – broker votes are eliminated on director elections, executive compensation, or any other significant matter, as determined by the SEC, for uninstructed shares held by beneficial owners.
  • Proxy Access – public companies will be required to (1) include a shareholder nominee to serve on the board of directors, and (2) follow a certain procedure with respect to the solicitation of proxies (the SEC is meeting this week to consider the proxy access rules).
  • Chairman and CEO Disclosures – SEC will issue rules that require public companies to disclose in their annual proxies the reasons why the company has chosen: (1) the same person to serve as chairman of the board and CEO, or (2) different individuals to serve as chairman of the board and CEO.

If you want to hear more about some of the practical things and action steps compensation professionals should be taking now to prepare for implementation of Dodd-Frank, tune in to the webcast, What compensation professionals need to know about financial reform legislation, I’ll be conducting with Dan Walter of Performensation and sponsored by HCR Software.  The webcast is this Wednesday (8/25) from 2 to 3 pm Eastern.  Here’s the link to the registration page: https://www1.gotomeeting.com/register/361114697

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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.

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Exequity Launches Quick-Take Survey Series: Invitation to Participate

Invitation to Participate in Exequity’s New Quick-Take Survey on Executive Pay Practices

Exequity invites you to participate in our new Quick-Take Survey on Executive Pay Practices. The survey should take about 10 minutes to complete and seeks to understand how executive pay practices are changing, especially the mix of pay, long-term incentive mix, elimination of perquisites, change-in-control provisions, and changes to employment contracts.

If you know anyone who might like to participate in this survey and receive a copy of the results, please forward this invitation to them.

Click HERE to take the survey

All participants will receive a complimentary copy of the survey results once they are released (approximately June 15, 2010).

As a special THANKS for participants* that agree to participate in our Quick-Take Surveys over the next 12 months (no more than one Quick-Take Survey per month), Exequity will provide complimentary access to our ProxEASE Parachute Modeler for up to 5 executives through the filing of their next proxy (a $5,500 value). ProxEASE provides a simple, menu-driven, web-based model to calculate the parachute excise tax implications of termination benefits, as required for disclosure in the employment termination portion of the annual proxy statement.

Existing ProxEASE subscribers are eligible to receive an extra year of the model for up to 5 executives if they agree to participate in our Quick-Take Surveys over the next 12 months.

If you have any questions about the survey, please contact:
– Ed Hauder at (847) 996-3990 or edward.hauder@exqty.com or
– Jeff Pullen at (847) 996-3967 or jeff.pullen@exqty.com

*Public or private companies that are not direct competitors of Exequity LLP
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