Executive Compensation

 
Contact us.About....html

A Guide to Executive Compensation in the Dodd-Frank Act


Other Exec Comp Provisions


DFA changes a number of other elements of how companies disclose and police exec comp.


Disclosures

Corporations have three new disclosures:


CEO Pay Equity Disclosure: annual total compensation of the CEO, median annual total compensation of all the company’s employees except the CEO, and the ratio between the two.


Pay-for-Performance Disclosure: the relationship between compensation paid to named executive officers and the company’s financial performance. The disclosure may include a graphic representation of this relationship similar to that of the “performance graph” required in the annual report.


Hedging by Directors and Employees: whether the corporation allows any employee (or director) to purchase financial instruments (including derivatives such as prepaid vehicle forward contracts, equity swaps, collars and exchange funds) that the employee will use to hedge or offset any decrease in the market value of any equity securities granted by the corporation to the employee.


These new disclosures will appear in the annual proxy materials, in the compensation section.


Incentive Compensation Clawback Policy

Companies must implement and disclose policies to recoup incentive compensation from current and former NEOs that the company awarded:


  1. ❖based on erroneous data;

  2. ❖received by the NEOs in the three-year period preceding a financial restatement; and

  3. ❖in excess of what the company would have paid if calculated under the restated financial results.


The company does not need to prove NEO “misconduct” to claw-back the affected compensation. It merely needs to restate financial results. The SEC will enforce this provision through stock exchange listing requirements, so companies face delisting if they don’t comply


Independence Requirements

Corporations have two new independence standards, for the BoD Compensation Committee, and for compensation consultants.


Independence of Compensation Committee Members: All members of the Comp Committee will need to be independent.


  1. ❖The SEC delegates to stock exchanges the specific independence standards.

  2. ❖The standards must consider relevant factors, including the receipt of consulting or advisory ‘fees’ and ‘affiliate’ status.


Most observers expect the standard to resemble the current independence standards that exchanges impose on BoD audit committees. If so, directors who own 10% or more of the company’s shares cannot serve on the comp committee.


Independence for Compensation Committee Advisors: Comp consultants will also need to be independent. The SEC delegates to stock exchanges the specific independence standards, which must include:


  1. ❖Other services that the consultant provides to the company

  2. ❖Amount of fees that the company pays to the consultant

  3. ❖Policies and procedures that seek to prevent conflicts of interest

  4. ❖Business or personal relationships between comp committee members and the consultant; and

  5. ❖Company stock that the consultant owns.


Companies must also disclose information about comp consultants in annual proxy materials:


  1. ❖If the comp committee retained a consultant;

  2. ❖If the consultant’s work raised a conflict of interest; and

  3. ❖If it raised a conflict, the nature of the conflict and how the company addressed it.


Again, because the SEC delegates these standards to stock exchanges, companies that fail to comply face delisting.