Executive Compensation

 
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A Guide to Executive Compensation in the Dodd-Frank Act


The Dodd-Frank Act (DFA) contains a wide range of changes pertaining to executive compensation plans of US corporations. We divide all these provisions into three general areas:


  1. ❖Shareholder votes on exec comp

  2. ❖Other provisions, including disclosure, independence, and clawback provisions.

  3. ❖Investor disclosure of their exec comp votes


The SEC has promulgated draft regulations on the shareholder votes and investor disclosure areas, with final regulations expected later in 2010 or early in 2011.


Below we summarize the three areas, and provide links to details on each.


We also have a download-able .pdf version of this guide.


Shareholder Votes

DFA now requires US corporations to submit three compensation matters to a vote:


  1. ❖Compensation of the top five executives (“say-on-pay”). The frequency of this vote will depend on the outcome of another vote (below).

  2. ❖Frequency of the say-on-pay vote (“say-on-frequency”). Investors can choose a say-on-pay vote cycle of every one, two or three years. Companies must have a say-on-frequency vote at least every six years.

  3. ❖Employee termination agreements, such as golden parachutes (“say-on-severance”).


These three votes are non-binding on the company, though.


Click here for detail and a checklist for investors on these shareholder votes, and for guidance on evaluating a company’s executive compensation plans.


Other Exec Comp Provisions

DFA also requires several new executive compensation disclosures beginning in 2011. These other provisions pertain to a wide range of items:


  1. ❖New exec comp disclosures and analyses

  2. ❖Independence requirements for BoD compensation committees and exec comp consultants

  3. ❖Compensation clawback in the case of a financial restatement.


Click here for detail and a checklist for investors on these other exec comp provisions.


Disclosure of Exec Comp Votes

DFA now requires most US asset managers to disclose how they vote on the three matters noted above. If an asset manager files a Form 13F disclosure of their holdings, then they generally need to comply with this requirement. This will work similarly to how mutual funds now disclose all shareholder votes, on Form N-PX, with the same timetable.


Click here for detail and a checklist for investors on shareholder disclosure of exec comp votes.


Compliance timetable

These requirements begin with votes that will take place on or January 21, 2011, and apply to shareholder meetings (annual and special meetings) beginning then. So, investors with portfolio companies whose fiscal year ends in the last quarter of 2010, and thus with annual meetings earlier in 2011, can expect to see proxy materials soliciting executive compensation votes in the next several weeks.


Asset managers (13F filers) will report votes annually. They report votes on Form N-PX for each July 1-June 30 period, with Form N-PX due on or before August 31. So, for 2011, they will report votes for period January 21-June 30, 2011 on or before August 31, 2011.


Exec Comp Checklist for Investors


  1. ✓Determine if you need to report exec comp votes, in general because you file Form 13-F.

  2. ✓Identify an exec comp framework that you will use to evaluate each company’s exec comp plan.

  3. ✓For investors that use a proxy advisor, assure that the proxy advisor will evaluate exec comp for your portfolio companies

  4. ✓Create a process for filing Form N-PX.

  5. ✓For each portfolio company, identify any relevant exec comp benchmarks and databases you want to consider in evaluating NEO comp.

  6. ✓Allow sufficient time to review a portfolio company’s proxy materials, value equity compensation plans, review proxy advisor recommendations, and compare plans to benchmarks.

  7. ✓Decide your vote on all compensation issues, which in 2011 will include say-on-pay and say-on-frequency.

  8. ✓Record your vote in the same way that you vote on other annual meeting agenda items, including director elections, shareholder resolutions, and other corporate matters.

  9. ✓For investors that report exec comp votes, record votes on Form N-PX pursuant to your filing process.