Big Changes Coming In Executive Pay Arena, Consultant Warns

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By Yin Wilczek

June 18 — While it's generally been quiet on the executive compensation front, companies should gird themselves for big changes ahead, a consultant said June 18.

According to some reports, the Securities and Exchange Commission may be gearing up soon to advance executive compensation-related regulations, said Steven Hall, managing director of compensation consultant Steven Hall & Partners LLC.

Hall also noted that the 2016 presidential elections will generate “noise” for how executives are paid, referencing Hillary Clinton's recent remarks at an event in Iowa—Clinton commented in Iowa in April that CEOs are paid “300 times” more than the American worker.

“As we get closer and closer to the election, the next year is going to be a really noisy one in terms of executive pay, not only from politicians but also the things that are going to feed into them,” such as the SEC's coming rule on CEO pay ratios, he said.

Hall spoke at an ALI-CLE executive compensation conference.

CEO Pay 

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC must require companies to disclose pay ratios comparing the CEO's pay to that of typical workers and to recover, after an accounting restatement, compensation improperly paid to current or former executive officers.

The SEC reportedly is planning to vote as soon as Aug. 5 on a pay ratio rule.

At the conference, Hall also noted that his firm is hearing that the SEC could propose a requirement for clawbacks in the near future. 

Hall observed that while corporate concern over the pay ratio may be abating, he also hasn't seen many companies “making a lot of effort” to prepare for the coming rule.

Going to Be ‘Ugly.'

As for clawbacks, Hall noted that while some companies have adopted clawbacks, others are waiting for the SEC requirements before acting. Noting that the SEC reportedly may be considering how options should be treated, Hall said “it's going to be ugly.” Companies will have a “lot of work to do” when the rule is implemented, he predicted.

As for the SEC's recently proposed pay-for-performance requirement, Hall noted that the commission's proposed new definition for compensation—that “actually paid”—“promises to bring us super confusion going forward.”

In addition to politics and SEC rules, Hall said that this year, companies also should look out for:

• stock market performance as it impacts outstanding long-term incentive equity grants and retention;

• the continued need for shareholder outreach;

• say-on-pay voting results;

• changing governance standards; and

• developments outside the U.S.

 

International Developments 

In terms of overseas changes, Hall urged companies to look to Asia and Europe in trying to predict what may take place in the U.S. in terms of executive compensation. “The U.S. is purely a follower with regard to governance issues related to pay,” he noted. “We're not a leader,” not “even slightly.”

Hall added that emerging international developments that may impact the U.S. include binding say-on-pay votes and capping executive compensation levels.

In other remarks, Hall suggested that a “big quandary” has emerged as to whom companies should send to speak to institutional investors about compensation matters. “It's just a little mixed at this point,” he said.

“It's pretty unanimous that” that person should not be the CEO, Hall said. He added that he's been told by funds that they want someone who can speak in detail and in a “deep manner” about compensation issues. Accordingly, it should be the highest-level individual with executive compensation responsibilities, such as the senior vice president for compensation, he said.

Another view that's been gaining ground is sending out the chair of the compensation committee, Hall continued. While that can “work really well” if the chair is “camera ready” and can answer questions well, it also could be an “utter disaster” if he or she doesn't have the full details and gets defensive, he said. That in itself is leading to changes where boards are considering compensation committee chairs not only for their qualifications and ability to lead, but also for their ability to communicate with the public, he added.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com