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By Yin Wilczek
July 23 — Companies should consider taking steps now to prepare for the SEC's coming executive compensation measures, attorneys said July 23.
In particular, they should take preemptive steps ahead of the adoption of the Securities and Exchange Commission's pay ratio rule and consider the implications of the commission's clawback proposal, Mayer Brown LLP attorneys said at a teleconference sponsored by the law firm.
The SEC's proposed pay ratio rule would require companies to disclose pay ratios comparing the chief executive officer's pay to that of typical workers. The commission reportedly may finalize the provision in the near future.
Michael Hermsen, a partner at Mayer Brown LLP's Chicago office, noted that even though the SEC has allowed for a fair amount of flexibility in the proposal, many companies may still find it challenging and/or costly to gather the required information.
“Public companies may want to evaluate their payroll and other compensation recordkeeping systems for advance planning purposes to preliminarily develop strategies for future compliance,” Hermsen said. In addition, they may want to review “how they would update their disclosure controls and procedures for pay ratio disclosure” once the SEC adopts the measure.
Meanwhile, the SEC July 1 proposed a rule that would require public companies to recover incentive-based compensation that is improperly awarded to executives.
Although the proposal is some way from being finalized, companies should not put off considering the implications of the requirements, said Laura Richman, counsel in Mayer Brown's Chicago office. “It will take thought and effort to develop compliance policies and related procedures to assess the implications of the clawback proposal on existing contract plans and governance documents, and possibly draft clawback provisions to use in new agreements.”
Richman also noted that clawback policies may impact accounting treatments, so companies should consider involving their accountants in their clawback policy conversations.
• consider whether their characterization of compensation in their compensation discussion and analyses as incentive-based could impact clawbacks; and
• evaluate the list of employees that may be impacted by the requirements.
Companies have a lot to work to do before the SEC finalizes its proposal, Richman added. “It makes sense to listed companies to use this period between the proposal and the ultimate compliance deadline to prepare.”
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