Executive Compensation: More SEC Dodd-Frank Rules Expected as Proxy Advisory Firm Oversight Continues
January 03, 2014
With a divided Congress not likely to make broad changes to executive compensation requirements in the next year, SEC Chair Mary Jo White has made it clear that the Commission will be focused on proposing and finalizing executive compensation rules under the Dodd-Frank Act. The Association’s Center On Executive Compensation will concentrate on shaping the proposed rules on clawbacks and pay for performance, as well as the final rules on pay ratio. Meanwhile, in an encouraging sign, the SEC is considering whether to provide revised guidance on the fiduciary duties of proxy advisory firms and institutional investors.
SEC Proposed Rules on Pay for Performance and Clawbacks, and Final Pay Ratio Rules In its annual regulatory forecast, the SEC predicted that by October it would propose rules under the Dodd-Frank Act on pay for performance as well as mandatory no-fault clawbacks, although it is possible that the proposals could come as soon as this spring. With respect to pay for performance disclosure, the Center On Executive Compensation joined with The Conference Board and the Society of Corporate Secretaries and Governance Professionals to provide a conceptual framework for realizable and realized pay that we have encouraged the Commission to draw from in drafting the regulations. Meanwhile, the no-fault clawback rules would require a clawback of any incentive compensation received by any current or former executive officer in the three years before a material restatement if the compensation would have been less had the financials been appropriately stated. The Center has submitted detailed examples of the practical issues the staff needs to consider in implementing the rules, such as how to execute a clawback when compensation committee discretion was used in determining incentive pay. The Association also will advocate for limiting the final pay ratio rules to U.S. employees only, consistent with its comments in meetings with Commissioners, staff and members of Congress. The SEC has estimated that final pay ratio rules could be published by October.
Proxy Advisory Firm Oversight Ramps Up Just before the holidays, the SEC held a roundtable discussion with stakeholders from multiple perspectives on the need for additional regulatory oversight of proxy advisory firms. The roundtable was a positive step in focusing on two SEC staff interpretive letters of concern. One eliminates the requirement that institutional investors conduct a case-by-case analysis of the independence of proxy advisory firms. Another gives proxy advisors wide latitude, including the ability to simultaneously provide consulting services to companies and research and voting advice to institutional investors. The Center On Executive Compensation will press the SEC to withdraw the staff letters and adopt new guidance that addresses conflicts and inaccuracies.
Proxy Season and Proxy Advisory Firm Expectations After increasing 10 percent in 2013, shareholder proposals on executive compensation are expected to increase again in the 2014 proxy season, with a focus on accelerated vesting of equity compensation, stock ownership and retention requirements, and seeking independent chairs. With respect to proxy advisory firms, in response to criticisms by the Center and others, ISS has revised its relative pay for performance test, which will analyze CEO pay and performance relative to peers over three years instead of over one and three years. In addition, in 2014, ISS will start determining on a case-by-case basis whether to vote against directors at companies that did not implement a shareholder proposal that was approved by a majority of votes cast in 2013. In response to a request by the Center and other business groups, ISS pledged that it will include, among other factors, a consideration of the board's rationale for how it chose to implement or not implement a majority-supported shareholder proposal in deciding whether to vote against directors. However, there is already evidence that companies may be adopting resolutions to avoid opposition to thier directors.
Legislative Oversight The Association and the Center will continue to push for pay ratio repeal though a divided Congress makes any legislative solution almost impossible. However, rigorous oversight is likely to prove more fruitful on proxy advisors and other issues. On another front, if tax reform discussions start in earnest, it is expected that limitations on the deductibility of executive compensation will be proposed, potentially along the lines of legislation (S. 1476) by Senators Jack Reed (D-RI) and Sidney Blumenthal (D-CT) that would prohibit any public company from deducting more than $1 million in employee compensation.