On July 29, 2011, the Securities and Exchange Commission (SEC) delayed its schedule for adopting rules on the four principal remaining executive compensation rules to be issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The adoption dates for rules on the following topics were moved to the January-June 2012 period. This delay means that these rules will not be in place for the 2012 proxy season.
The four executive compensation topics on which rules have been delayed are:
- Pay versus Performance Disclosure
Companies will be required to disclose pay versus performance information in proxy statements for annual meetings, including the relationship between executive compensation actually paid and the financial performance of the company. This disclosure may be provided graphically.
- CEO Pay Comparison
The so-called “internal pay equity” disclosure comparing CEO pay to median compensation of all employees is likely to be one of the most controversial of the remaining rules. The rule is also likely to be the most technically difficult to implement, particularly for large companies. Under this requirement, companies will have to disclose: (a) the median annual total compensation of all employees of the company, excluding the CEO; (b) the annual total compensation of the CEO; and (c) the ratio of the amounts in (a) and (b). For purposes of performing these calculations, “total compensation” is determined under the same rules as for determining total compensation shown in the Summary Compensation Table of the proxy statement. As an example of the complexity involved in implementing these new disclosure requirements, most companies do not have systems currently in place to measure compensation for all employees on the same basis as the Summary Compensation Table, such as the increase in value of pension benefits.
- Compensation Clawback Policies Required
Dodd-Frank requires listed companies to develop and implement policies providing for recovery (“clawback”) from current or former executive officers of “erroneously awarded” incentive compensation in the event of an accounting restatement required due to material noncompliance with financial reporting requirements under the securities laws. For purposes of the clawback requirement, “erroneously awarded” compensation is the incentive compensation paid to an executive officer of the company during the three years preceding the restatement in excess of what would have been paid to the executive under the accounting restatement. The clawback applies to all executive officers, whether or not the officer engaged in misconduct. Companies that do not comply with these clawback requirements could be delisted. In addition, companies will have to disclose the company’s policy on incentive compensation based on reported financial information.
- Disclosure of Hedging Policies
Under these rules, companies will be required to disclose in proxy statements for annual meetings whether any employee, director or designee may hedge ownership of the issuer’s equity securities through the purchase of financial instruments, such as prepaid variable formal contracts, equity swaps, collars and exchange funds. The disclosure applies to hedging by executives or directors with respect to company stock received as compensation or stock they otherwise hold directly or indirectly. The rules will not require a company to have a hedging policy but the likely effect of the disclosure will be adoption of a policy by most companies and a tightening of many policies.
Two remaining pieces of the Dodd-Frank Act rules affecting executive compensation are still scheduled to be adopted by the end of 2011. The first is the rules regarding disclosure by institutional investment managers of how they voted on say-on-pay and say-on-frequency proposals. The second is the rules providing the guidelines for the adoption of new listing standards addressing compensation committee independence and factors affecting compensation adviser independence along with disclosure rules regarding compensation consultant conflicts (see our April 28, 2011, news alert).