Dodd-Frank Essentials: Executive Compensation Requirements And Disclosures

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Several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act have brought compensation of financial institution executives into the public eye. Although disclosure of executive and director compensation dates back to the 1930s, Dodd-Frank’s most highly publicized requirement, “say-on-pay,” shifts the disclosure to a dialogue with shareholders, essentially allowing shareholders to vote on compensation for certain executives. As the Securities and Exchange Commission continues to implement new rules necessitated by Dodd-Frank, compensation represents another area requiring increased scrutiny by boards of directors.
 
Through passage of the Dodd-Frank Act, the Securities and Exchange Act was amended in several ways, requiring new SEC rulemaking that is not yet complete. The Dodd-Frank Act established certain independence standards for compensation committees and mandated that the compensation committee be provided certain resources to hire a consultant and other advisers. Also, new section 10D requires issuers to adopt and enforce policies on clawbacks of executive compensation in cases where the issuer restates financial statements.
 
The Dodd-Frank Act added section 14A to require periodic shareholder voting on executive compensation and on golden parachutes in connection with mergers/combinations. New section 14(i) requires companies to disclose the ratio between total executive compensation and median compensation paid to other employees. Section 14(j) requires companies to disclose whether directors and officers may purchase derivatives allowing hedging against decreases in the market value of stock grants.
 
In 2011, the SEC issued rules on the “say-on-pay” provisions of the Dodd-Frank Act, requiring shareholder votes at least once every three years. The rules also provided that the vote on frequency of the say-on-pay vote must be held at least once every six years, and that the vote on golden parachute compensation must be held whenever the company solicits shareholder approval of an acquisition. Smaller reporting companies were exempt from the say-on-pay provisions until 2013 meetings.
 
In April 2012, Congress provided some relief for companies by passing the Jumpstart Our Business Startups Act (“JOBS Act”), which cut back some of the Dodd-Frank Act compensation regulations. The JOBS Act cut back the say-on-pay and other requirements of the Dodd-Frank Act, but only for “emerging growth companies” that went public after December 8, 2011.
 
The most recent executive compensation rules were issued September 18, 2013, which implemented section 953(b) of the Dodd-Frank Act. A public company must disclose the ratio of the median annual total compensation of all employees to the total compensation of the CEO. The new rule does not impact the 2014 proxy season and does not apply to smaller reporting companies (public float of less than $75 million), foreign private issuers or emerging growth companies under the JOBS Act. The first pay ratio disclosure under this new rule would be required in a company’s 2016 proxy statement. 
 
Regarding logistics of the new rule, the median annual employee compensation must include all part-time, temporary, seasonal and non-U.S. employees of a company and its subsidiaries who are employed as of the last day of the company’s fiscal year. Companies cannot make full-time equivalent adjustments for part-time employees or annual pay adjustments for temporary and seasonal employees. Once the median employee compensation is identified, both the total annual compensation of the median employee and the CEO must be disclosed based on item 402 of Regulation S-K, which governs calculation of CEO pay. The new SEC rule provides a 60-day comment period, after which the SEC will conduct additional rulemaking on this issue.
 
Significant aspects of the Dodd-Frank Act remain to be implemented, and this latest requirement presents additional challenges and potential public relations issues. It is important for financial institutions required to disclose the ratio to perform correct calculations and provide an accurate disclosure.

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Several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act have brought compensation of financial institution executives into the public eye. Although disclosure of executive and director compensation dates back to the 1930s, Dodd-Frank’s most highly publicized requirement, “say-on-pay,” shifts the disclosure to a dialogue with shareholders, essentially allowing shareholders to vote on compensation for certain executives. As the Securities and Exchange Commission continues to implement new rules necessitated by Dodd-Frank, compensation represents another area requiring increased scrutiny by boards of directors.

Through passage of the Dodd-Frank Act, the Securities and Exchange Act was amended in several ways, requiring new SEC rulemaking that is not yet complete. The Dodd-Frank Act established certain independence standards for compensation committees and mandated that the compensation committee be provided certain resources to hire a consultant and other advisers. Also, new section 10D requires issuers to adopt and enforce policies on clawbacks of executive compensation in cases where the issuer restates financial statements.

The Dodd-Frank Act added section 14A to require periodic shareholder voting on executive compensation and on golden parachutes in connection with mergers/combinations. New section 14(i) requires companies to disclose the ratio between total executive compensation and median compensation paid to other employees. Section 14(j) requires companies to disclose whether directors and officers may purchase derivatives allowing hedging against decreases in the market value of stock grants.

In 2011, the SEC issued rules on the “say-on-pay” provisions of the Dodd-Frank Act, requiring shareholder votes at least once every three years. The rules also provided that the vote on frequency of the say-on-pay vote must be held at least once every six years, and that the vote on golden parachute compensation must be held whenever the company solicits shareholder approval of an acquisition. Smaller reporting companies were exempt from the say-on-pay provisions until 2013 meetings.

In April 2012, Congress provided some relief for companies by passing the Jumpstart Our Business Startups Act (“JOBS Act”), which cut back some of the Dodd-Frank Act compensation regulations. The JOBS Act cut back the say-on-pay and other requirements of the Dodd-Frank Act, but only for “emerging growth companies” that went public after December 8, 2011.

The most recent executive compensation rules were issued September 18, 2013, which implemented section 953(b) of the Dodd-Frank Act. A public company must disclose the ratio of the median annual total compensation of all employees to the total compensation of the CEO. The new rule does not impact the 2014 proxy season and does not apply to smaller reporting companies (public float of less than $75 million), foreign private issuers or emerging growth companies under the JOBS Act. The first pay ratio disclosure under this new rule would be required in a company’s 2016 proxy statement. 

Regarding logistics of the new rule, the median annual employee compensation must include all part-time, temporary, seasonal and non-U.S. employees of a company and its subsidiaries who are employed as of the last day of the company’s fiscal year. Companies cannot make full-time equivalent adjustments for part-time employees or annual pay adjustments for temporary and seasonal employees. Once the median employee compensation is identified, both the total annual compensation of the median employee and the CEO must be disclosed based on item 402 of Regulation S-K, which governs calculation of CEO pay. The new SEC rule provides a 60-day comment period, after which the SEC will conduct additional rulemaking on this issue.

Significant aspects of the Dodd-Frank Act remain to be implemented, and this latest requirement presents additional challenges and potential public relations issues. It is important for financial institutions required to disclose the ratio to perform correct calculations and provide an accurate disclosure.