Jim Gandurski, Chicago
President Obama has signed into law a sweeping financial reform bill that has major implications for compensation plan design and governance at all public companies.
Much of the attention for the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) has centered on new “say-on-pay” requirements (read our deep dive into these rules in our June 2010 Bulletin), but there are several other aspects of the legislation that will be important to compensation consultants and practitioners.
- Say-on-Pay — This provision gives shareholders a non-binding vote on executive pay levels and design. The bill also requires that companies include a separate resolution related to the frequency of the vote. In other words, shareholders will be asked to determine whether the vote takes place every year or less frequently, such as every two or three years. In addition, companies undergoing a merger or acquisition will be required to provide a non-binding shareholder vote that clearly outlines how any golden parachute agreements or arrangements would be impacted by the event.
These “say-on-pay” votes must be implemented at the first shareholder meeting that occurs six months after the legislation is adopted. Thus, they will be on the ballot for the 2011 proxy season.
- Compensation committee and advisor independence — All members of the compensation committee will be required to be independent according to the standards for listing on an exchange. Additionally, the compensation committee must have the authority to engage compensation consultants and other advisors that meet independence standards.
- Clawback policies — The bill requires that companies include compensation recovery (or “clawback”) policies that allow companies to recover incentive-based compensation if it was earned based on inaccurate financial statements that require a restatement by the company. The policy contains a three-year look-back period for compensation paid prior to the restatement and would also cover any stock options granted. Further, all public companies will be required to provide disclosure of their compensation recovery policy in publicly filed proxy statements. The rules will apply to both current and former executives.
- Enhanced disclosures — The SEC will be required to amend disclosure rules that require companies to include a comparison of executive compensation levels and stock price performance over a five-year period in order to demonstrate the link (or lack thereof) of pay and performance.
- Internal pay ratio — The SEC will be required to amend disclosure rules requiring companies to include a comparison of the total annual compensation for the CEO and the median annual total compensation for all other employees. The intent of the disclosure will be to illustrate the ratio of employee pay to CEO pay.
These reforms will undoubtedly complicate the lives of compensation professionals in all public companies. Companies should begin planning now for the new landscape. Businesses also need to remain aware that instructions in the legislation for governing bodies such as the SEC and the Government Accountability Office could lead to future legislation.
Enjoy the other articles featured in this issue of Compensation and Benefits Bulletin:
- New DOL regs require more fee disclosure from retirement plan providers, Barbara Josefowicz, New York
