Legislative Themes Addressing Executive Compensation Remain Predominantly the Same
Yesterday Senator Dodd (Chairman of the Senate Banking Committee) introduced the "Restoring American Financial Stability Act of 2010" (PDF), yet another piece of legislation to address perceived abuses in executive compensation. As I read all 1,336 pages of the bill (just kidding, the executive compensation provisions are contained in pages 868 through 900), I noticed that many of the issues addressed are substantially similar to prior bills introduced over the last 12 months. I thought readers might benefit from a summary of the most repeated issues.
Background on Recent Legislation
The following are the more significant items of legislation that was introduced or passed within the last 10 months or so.
- On May 19, 2009, Senator Schumer introduced the "Shareholder Bill of Rights Act of 2009."
- On July 22, 2009, Senators Levin and McCain introduced "Ending Excessive Corporate Deductions for Stock Options Act."
- On July 31, 2009, the House of Representatives passed the "Corporate and Financial Institution Compensation Fairness Act of 2009," which was introduced by Congressman Frank.
- On November 10, 2009, Senator Dodd (with 8 other Senators, including Senator Schumer) introduced the "Restoring American Financial Stability Act of 2009," which was referred to the Senate Banking Committee.
- On February 26, 2010, Senator Menendez introduced the "Corporate Executive Accountability Act of 2010."
- On March 15, 2010, Senator Dodd introduced the "Restoring American Financial Stability Act of 2010."
Summary of Certain Issues Repeatedly Addressed
It is not certain which legislation or issues will become law, however, it is safe to assume any such law would include some or all of the following issues (not intended as an exhaustive list):
- Say-on-Pay. This is an obvious one. It would require a public company to provide its shareholders with an annual non-binding vote on all compensation disclosed in the proxy statement. In some cases a separate non-binding vote would apply to change-in-control payments and any related gross-ups.
- Independence of Compensation Committee Members. It would require the SEC to bolster its rules relating to independence of compensation committee members. Additionally, it would require independence of those hired by the compensation committee (as opposed to the new SEC proxy disclosure rules which attempt to influence such behavior through disclosure).
- Clawbacks. It would amend Section 304 of SOX to (i) include all executive officers (not just the CEO and CFO), (ii) eliminate the requirement that a clawback be triggered due to "misconduct," and (iii) expand the period covered from 12 months to 3 years. As indicated in a previous post (Prior Post), there are a few deficiencies within Section 304 of SOX that could be bolstered either through enacted legislation or by proactive efforts of compensation committees, preferably the latter.
The following are not repeated among the various bills, but listed because they are somewhat interesting (not intended as an exhaustive list):
- CD&A Pay Comparisons. Senator Dodd's bill would require a graph or pictorial showing the relationship between executive compensation actually paid and the financial performance of the company. Senator Menendez's bill would require a comparison of the CEO's pay to the median pay of all employees, disclosed in the form of a ratio.
- Stock Options. Senators Levin/McCain's bill would limit tax deductions for stock options to the amount expensed under ASC Topic 718 (formerly FAS 123R). Additionally, it would eliminate stock options from qualifying as "performance-based" compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended.
It is likely there will be some form of enacted legislation this year. So stay tuned!
