Pending Dodd-Frank Rules, Investors Complicating Compensation Committee Jobs

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By Yin Wilczek

June 2 — With several Dodd-Frank provisions yet to be implemented, board compensation committees are operating in a highly uncertain environment, according to a June 2 National Association of Corporate Directors report.

At the same time, the focus on such committees has never been more intense, the NACD's Blue Ribbon Commission report concludes.

“The combination of increased expectations by investors, media and stakeholders, coupled with the SEC’s rules stemming from the Dodd-Frank Act—such as the recent proposed rule on pay-for-performance, are creating significant pressure on the compensation committee,” NACD President Peter Gleason told Bloomberg BNA in an e-mail.

“Furthermore, the components of executive and board compensation plans and the link between compensation structures and company performance are under intense scrutiny from shareholders, employees, policymakers, the media, and other stakeholders,” Gleason said.

Changed Environment 

The NACD reviewed the changes in the executive compensation environment since it last looked at the issue in 2007. Among other changes, it found that pay packages are becoming increasingly complex, while the areas requiring compensation committee oversight have significantly expanded.

The report offered 10 recommendations, including that compensation committees should work with boards to establish an executive pay philosophy to support the company in creating long-term and sustainable value.

Stanley Keller, of counsel in Locke Lord LLP's Boston office, agreed with the report that compensation committees face increased challenges.

“The combination of enhanced disclosure requirements, added metrics for evaluation of compensation mandated by Dodd-Frank, increased demands of and scrutiny by activist shareholders, and greater focus by the courts on fiduciary duties in dealing with compensation, have resulted in the demands on compensation committees approaching those on audit committees,” he said.

Dodd-Frank

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission must implement myriad executive compensation requirements.

The rules yet to be finalized by the SEC include disclosure requirements for pay ratios, pay for performance and employee and director hedging, and those for clawing back executive pay. The agency's latest unified agenda suggests that further action on the requirements may have to wait until spring 2016.

Say-On-Pay 

However, one Dodd-Frank requirement—say-on-pay—already has transformed the landscape for corporate pay packages. According to a recent NACD survey, almost one-third of boards changed their executive compensation plans outright as a result of investor pressure.

The NACD report also found that say-on-pay has transformed the design of some pay packages, and resulted in the compensation discussion and analysis (CD&A) becoming the primary communication tool for the compensation committee.

In the report, however, the NACD urged compensation committees not to design pay plans based on the fear of receiving a negative say-on-pay vote. If the committee continues to focus on creating programs that fit the corporate strategy and create long-term value—and can clearly communicate that to shareholders—that greatly enhances the company's chances of receiving a positive say-on-pay outcome.

The report also recommended that:

• compensation committees should ensure pay disclosures clearly explain, in plain English, how compensation decisions are tied to performance; and

• the compensation committee chair should be prepared and “presentation ready” for shareholder communications.

 

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

The report is available for members or for purchase at https://www.nacdonline.org/CompBRC.