The NASPP Blog

August 5, 2010

Beyond Say-on-Pay

Last Tuesday, I blogged about the Say-on-Pay provisions of the Dodd-Frank Act, but the Act includes a number of other corporate governance provisions that are of interest to stock plan professionals. Luckily, the presentation I attended by Mike Andresino of Posternak Blankstein & Lund and David Wise and Sara Wells of Hay Group at the Silicon Valley NASPP chapter meeting covered these aspects of the Act as well.

The Dodd-Frank Act: More Than Say-on-Pay
The Dodd-Frank Act is very broad in scope, with banking legislation and consumer protections as well as regulating private placements and private investment funds–that’s nice to know, but we don’t really care about any of it for purposes of this blog.  I want to focus on the areas of the Act that are likely to intersect with my readers’ job responsibilities.

Internal Pay Equity

As I noted in my June 29 blog, the Act requires companies to disclose the ratio of CEO pay to the median pay of all other employees.  I understand that the jury is still out on how this ratio will actually be computed–preparing a Summary Compensation Table for all employees just to calculate their median pay may not be feasible–but, regardless, this disclosure is likely to cause a lot of consternation (David Wise pointed out that it was a top focus of the business lobby). The definition of all employees could include employees in overseas operations, including, say, manufacturing plants in countries where wages are considerably lower than in the United States. We are only beginning to contemplate the implications of this disclosure.

Relationship of Pay to Performance

Companies will be required to disclose the relationship of executive compensation to corporate financial performance. Like Say-on-Pay, this is another provision that I naively thought we already had–i.e., the performance graph in the executive compensation disclosures.  Silly me. As Mike Andresino pointed out, the Act doesn’t limit the disclosure to just the top five NEOs, so this “pay for performance” disclosure could be quite a bit more work to put together than the performance graph.

According to a Pearl Meyer & Partners memo on the Act that we’ve posted in the NASPP’s Say-on-Pay Portal, there are lots of issues to resolve for this requirement, including which “executives,” what “compensation,” what “financial performance,” the time period the disclosure covers, and whether the disclosure is on an aggregate or individual basis (or by component of compensation–imagine what fun that would be to put together).

Clawbacks

The Act expands the requirements for companies to adopt clawback policies for compensation paid to executives beyond what was required under Sarbanes-Oxley.  According to the NASPP’s 2010 Domestic Stock Plan Design Survey (co-sponsored by Deloitte), only 32% of respondents have clawback policies for stock compensation and of those that don’t, only 20% are considering adding one. That’s going to have to change.

Broker Non-Votes

The Act requires the SEC to direct the stock exchanges to prohibit brokers from voting uninstructed shares for director elections, executive compensation matters (e.g., Say-on-Pay), and any other significant matter (brokers are already prohibited from voting uninstructed shares on matters relating to stock plans).     

This doesn’t leave a whole lot that brokers can vote uninstructed shares on.  Mike Andresino pointed out that if there’s nothing in the proxy that brokers can vote on without instruction, companies may have problems achieving a quorum at shareholder meetings.

Compensation Committees

The Act requires the stock exchanges to establish new independence standards for compensation committee members. In addition, the committee must have the ability to retain its own independent (per standards to be determined by the SEC) comp consultants, legal counsel, and other advisors.

18th Annual NASPP Conference
Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay and all of the other executive pay reforms required under the Dodd-Frank Act. Just announced–we’ve added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara