Executive Compensation: Change May Be Coming, But When and How Much Unclear


Lawyers

The future of select executive compensation provisions under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203) remains uncertain as we enter the New Year because efforts already are underway to repeal and amend Dodd-Frank by the Republican controlled Congress coupled with the incoming Trump administration.

Financial CHOICE Act – Will it Gain Traction?

The Financial CHOICE Act (H.R. 5983) is generating significant buzz regarding the future regulation of executive compensation because the bill proposes to repeal and amend select Dodd-Frank provisions among other changes. The bill, pending before the House Financial Services Committee, is sponsored by Chairman Jeb Hensarling (R-TX).

Executive compensation practitioners are keeping a close eye on the status of the FCA. The bill, if passed, will impact the Securities Exchange Commission’s final and proposed rules to implement the executive compensation provisions of Dodd-Frank as follows:

  • Pay Ratio. The final rule requires companies to disclose the ratio of pay between CEOs and the median employees (SEC Release No. 33-9877). The FCA proposes to repeal the final rule. Practitioners, however, are advising clients to timely prepare pay ratio disclosures for inclusion in their 2018 proxy materials. 
  • Say-on-Pay. The final rule requires companies to hold shareholder advisory votes regarding the approval of executive compensation and frequency of these votes, also referred to as say-on-frequency (SEC Release No. 33-9178). The FCA proposes to amend the current say-on-frequency rule in effect since 2011 requiring companies to vote “not less frequently than once every 3 years” to “each year in which there has been a material change to the compensation. . .”   
  • Incentive-Based Compensation. The proposed rule requires disclosure of and prohibits certain incentive-based compensation by covered institutions that provide excessive compensation or that could lead to material financial loss (SEC Release No. 34-77776). The FCA proposes to repeal the proposed rule.  
  • Clawbacks. The proposed rule prohibits the national stock exchanges from listing securities of companies that have not developed and implemented compensation clawback policies (SEC Release No. 33-9861). The FCA proposes to amend the proposed rule by limiting the scope of the clawback rule to current and former executives who had “control or authority” over the company’s financial statements, which resulted in the accounting restatement.  
  • Hedging. The proposed rule requires companies to disclose whether employees or directors are permitted to hedge of offset any decrease in market value of the company’s equity granted to employees or directors as compensation (SEC Release No. 33-9732). The FCA proposes to repeal the proposed rule.  
  • Pay v. Performance. The proposed rule requires companies to disclose the relationship between executive compensation actually paid and the financial performance of the company (SEC Release No. 34-74835). The FCA doesn’t address pay v. performance.  

SEC Shuffle

The SEC faces a potential change in the composition of its commissioners. Currently, there are two vacancies on the SEC Commission.  Chair Mary Jo White also announced her plans to leave the agency in Jan. 2017.  The incoming Trump administration likely will replace these three SEC vacancies, which will impact the agency’s future rulemaking decisions.

What’s Next?

Practitioners predict that there will be changes in the regulation of executive compensation this year, but the degree of change remains uncertain.  Updates regarding the latest FCA developments and associated impact on the executive compensation provisions of Dodd-Frank will follow throughout the upcoming year. 

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