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Tag Archives: Compensation

New SEC Executive Compensation Proposal Requires More Than Just Additional Disclosures

The SEC has released a new rule proposal for executive compensation disclosures for next proxy season. In broad strokes, the proposal calls for disclosing information about “the relationship of a company’s overall compensation policies to risk, director and nominee qualifications, company leadership structure, and the potential conflicts of interests of compensation consultants.” All these items seem like things a shareholder would want to know about.

But, as the SEC lays out the arguments for the new rules in the release, it becomes clear that the Commission is concerned with more than just accurate disclosure of compensation. The SEC is also apparently interested in influencing issuer behavior and changing the way issuers compensate.

For example, on page 8 of the release, the Staff explains that there is a concern that “compensation policies have become disconnected from long-term company performance because the interests of management and some employees, in the form of incentive compensation arrangements, and the long-term well-being of the company are not sufficiently aligned.” The SEC’s solution is a requirement for new disclosures about “how a company’s overall compensation policies for employees create incentives that can affect the company’s risk and management of that risk.”

One interpretation of this requirement is the SEC just wants shareholders to know how companies think about risk when they compensate employees. A more meddlesome interpretation is that the SEC wants issuers to stop using compensation to create short-term incentives that don’t benefit the company in the long-term.  But, whether an issuer’s compensation system is …

Potential Executive Compensation Proxy Disclosures

A variety of sources are now proposing new rules for financial markets and corporate governance. Just recently President Obama released a “white paper” for financial regulatory reform. Before that, Congressman Gary Peters introduced the Shareholder Empowerment Act of 2009, and before him, Senator Charles Schumer touted a “Shareholder Bill of Rights.”

Tangentially related to all such proposals (and an easy way to resonate with constituents), is the idea that executive compensation needs to be revamped as well. The SEC has not ignored this issue. Most recently, On June 10, 2009, Chairman Mary Schapiro issued a statement considering several proposals requiring greater proxy disclosure of the following:

  • How a company and its board manages risk
  • What is the company’s overall compensation approach? (the goal of this question being to discourage incentive structures that reward short-term risk taking without accounting for long-term effects)
  • Potential conflicts with compensation consultants; and
  • Board of director leadership structure

Such proposals are likely to have the same effect as the rules of the past few years requiring a Compensation Discussion & Analysis. The rules are instituted under a mantle of protecting investors by ensuring they have information needed to make investment decisions, but they are also passed with an eye toward influencing issuer behavior and pushing it in a particular direction. For example, a requirement that a board disclose its overall compensation approach has the same effect as a requirement that a board actually have an overall compensation approach (which it may …

Geithner announces support for executive compensation reforms, but Congress might have its own agenda

On Wednesday, June 10, Secretary of the Treasury, Timothy Geithner outlined the Obama administration’s new proposals on executive compensation. The proposals focused on greater independence of corporate compensation committees and giving shareholders a nonbinding vote on executive compensation, commonly known as ‘say on pay’ provisions. Geithner outlined five guiding principals for executive compensation, namely:

  1. compensation plans should properly measure and reward performance;
  2. compensation should be structured to account for the time horizon of risks by aligning executive (and highly compensated individual) pay with long-term value creation;
  3. compensation should be aligned with sound risk management;
  4. golden parachutes and supplemental retirement packages should properly align the interests of executives with the interests of shareholders; and
  5. the compensation setting process should promote transparency and accountability.

Geithner promoted the administration’s support for legislation requiring greater compensation committee independence for companies listed on the national securities exchanges. The proposed legislation would require compensation committee members to meet the stringent independence standards required of audit committee members under the Sarbanes Oxley Act. In addition, the proposed legislation would provide compensation committees with the right to (i) hire compensation consultants, (ii) hire legal counsel, and (iii) require each company to “appropriately” fund the compensation committee to allow it to execute its independent compensation oversight responsibilities.

In addition, Geithner promoted the administration’s support for legislation requiring non-binding ‘say on pay’ votes by shareholders. The legislation would require all public companies to include a proposal to allow shareholders to approve or disapprove of the compensation arrangements listed in a company’s …