Corporate Governance

How the Wall Street Reform Act Impacts Smaller Businesses: Executive Compensation

By J Robert Brown Jr.

The Act addresses the continuing public outcry over executive compensation in a number of ways. First, it requires that companies subject to the SEC's proxy rules submit executive compensation to a non-binding shareholder vote at least once every three years.27 Secondly, at least once every six years, the company must ask shareholders whether the shareholders desire to vote on executive compensation every one, two or three years.28 Shareholders also have to be asked to approve golden parachute provisions in executive employment contracts (provisions that are contingent on a merger, consolidation, sale of the company or its assets).29 In none of the foregoing cases are the shareholder votes considered to be binding, but the results of the votes must be disclosed to the shareholders.30 The Act further provides that the shareholder vote? additional fiduciary duties for the company or board or limiting the ability of shareholders to submit executive compensation proposals for inclusion in the company's proxy materials. The SEC has authority to exempt companies from the say-on-pay requirements after taking into account, among other considerations, whether they would disproportionately burden smaller companies.

A company's board of directors must establish a compensation committee consisting of independent directors before the company's securities can be listed on a stock exchange. Proxy statements and annual reports filed with the SEC31 must describe certain information about compensation committees where they exist. Section 952 of the Act adds § 10C to the 1934 Act to further define the requirements for an independent compensation committee. It also mandates that compensation committees shall have the right (and be allocated the necessary funding) for the retention of compensation consultants, legal advisors, and other advisors. The Act sets forth certain independence factors that the compensation committee must consider before selecting any such advisor – with Congress' goal in all cases being to minimize or eliminate conflicts of interest between the advisors to the compensation committee and the other work, if any, the compensation consultant or its affiliated persons may perform for the company itself.32

In another provision regulating the disclosure of executive compensation, § 953 of the Act adds § 14(i) to the 1934 Act which requires the disclosure of compensation payable to executives and the relationship between executive compensation actually paid and the financial performance of the issuer and distributions to shareholders.33 In addition, Congress directs the SEC to amend its executive compensation disclosure rules34 to disclose the compensation of the chief executive officer as compared to the median annual total compensation of the issuer paid to all employees other than the chief executive officer, as well as the ratio thereof.35

Because performance compensation may be calculated on financial information that is later discovered to be incorrect, the Act also requires (as a listing standard) all listed companies to develop and implement a policy providing for the disclosure of incentive-based compensation and, if there is an accounting restatement, a provision to recover erroneously paid incentive based compensation.36

The Act also requires each issuer to disclose whether any employee or member of the board of directors, or any designee of any employee or board member, is permitted to purchase hedges – that is, financial instruments that are designed to hedge or offset against any decrease in the market price for the issuer's securities.37

Herrick K. Lidstone, Jr., Burns Figa & Will, PC

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27 Section 951 of the Act, adding § 14A(a)(1) to the 1934 Act. These votes (say on pay and the timing for future votes) are required at the first shareholder meeting occurring after six months from the date of enactment.
28 Section 951 of the Act, adding § 14A(a)(2) to the 1934 Act.
29 Section 951 of the Act, adding § 14A(b) to the 1934 Act. The say-on-golden parachute vote is required at the first shareholder meeting occurring after six months from the date of enactment.

30 Section 951 of the Act, adding § 14A(c) and (d) to the 1934 Act.
31 See Item 407(e) of Regulation S-K, incorporated into Form 10-K by Items 10 and 11 and into the proxy statement by Items 7 and 8 of Schedule 14A. A compensation committee is also a requirement of the NYSE Listed Company Manual (§ 303A05) and Rule 5605(d) of the Nasdaq Corporate Governance Requirements.
32 The Act requires the SEC to act within 360 days after enactment.

33 Section 953(a) of the Act. Compensation consultant disclosure must be included in proxy statements for any annual meeting occurring on or after one year from enactment – suggesting that the SEC must complete its rule making well before that date.

34 Found in Item 402 of Regulation S-K.
35 Section 953(b) of the Act.

36 Section 954 of the Act, adding § 10D to the 1934 Act.
37 Section 955 of the Act, adding § 14(j) to the 1934 Act.

Full post as published by The Race to the Bottom on July 29, 2010 (boomark / email).