On Friday, the House Committee on Financial Services held a hearing on executive compensation oversight in light of new requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203), the sweeping financial overhaul legislation signed into law on July 21, 2010 that contains a number of provisions impacting the regulation of executive compensation in publicly traded companies. Panelists were asked their views on whether the compensation-related provisions would be effective in revising corporate incentive pay structures to reduce the incidence of risk-taking, and what federal regulators should take into consideration in drafting rules to implement these provisions. Although most of the witnesses focused on the Act’s impact on financial services companies only, one did address how the executive compensation provisions would impact all publicly traded companies.
Speaking on behalf of the Society of Corporate Secretaries and Governance Professionals, Darla Stuckey (pdf) generally agreed that the changes imposed by the Dodd-Frank Act would help companies manage and oversee risk, but laid out a number of concerns she had with certain sections of the Act. Stuckey’s concerns and suggestions include the following:
- The “say-on-pay” provision of the Act, Section 951, requires companies to provide their shareholders with a non-binding vote on the compensation of their executives. The Act also mandates that employers provide their shareholders with a non-binding vote on how often the say-on-pay vote should occur. Such votes are required for all shareholder meetings held after January 21, 2011. The Securities Exchange Commission (SEC) intends to issue rules implementing these provisions between January and March or 2011. Stuckey testified that the SEC should instead issue its proposed rules in October of 2010 so that the final rules can be implemented before the 2011 proxy season. In addition, she argued that when the say-on-pay votes should be held should be influenced by the company’s board of directors’ recommendation, as members of the board “are in the best position to recommend the frequency of the vote, to ensure that the timing of the vote is aligned with the compensation program and the duration of the incentive structure.”
- Section 953(a) requires that companies disclose the relationship between executive compensation paid and financial performance. Stuckey urged the SEC to issue rules “with enough flexibility to allow compensation committees to explain their decisions, to explain when compensation is ‘actually paid,’ over which period performance is measured, and how performance is measured.”
- Section 953(b) mandates that companies disclose the median of the annual total compensation of all employees (other than the CEO) of the company, the compensation of the CEO, and a comparative ratio. The witness testified that the SEC should clarify that the calculation should take into consideration only U.S.-based, full-time employees, and that “total compensation” should exclude pension accrual.
- Section 954 requires certain companies to develop policies to recapture (“clawback”) excessive incentive compensation that should not have been awarded in light of the company’s financial situation. The witness claimed that company boards should have the discretion to determine whether to “claw back” and how to recoup funds.
- Finally, with respect to the whistleblower provisions contained in Section 922 of the Act that create a financial incentive program to encourage individuals to report SEC violations, Stuckey expressed concern that these provisions “will so significantly incentivize and encourage employees to report concerns of potentially improper conduct directly to the SEC that employees will bypass the extensive compliance programs that companies already have in place, and thus undermine their effectiveness. The unintended consequence of the Act may be that companies will have a more difficult time detecting and investigating misconduct and taking prompt corrective action when violations are found.”
A complete list of panelists and copies of their written testimony, in addition to a link to the hearing’s webcast, can be found here.
For more information on the Dodd-Frank Act’s executive compensation provisions, see Littler’s ASAP: Executive Compensation and the Wall Street Reform and Consumer Protection Act by Nick Linn, Ilyse Schuman, and Ellen Sueda.
Photo credit: MBPHOTO, Inc.