Key issues: Executive compensation and say on pay

The Dodd-Frank Act requires public companies to adopt a nonbinding periodic say on pay vote for executive compensation as well as a nonbinding vote on the frequency of say on pay votes. The Act also requires a nonbinding vote on golden parachutes. The final rules, which were released in January 2011, also grant a two-year deferral for smaller public companies. Say on golden parachute rules have been in effect for all companies since April 25, 2011.

In the first year of the nonbinding advisory vote on executive compensation under the Dodd-Frank Act, 98% of public companies received favorable say on pay votes. This was despite the fact proxy advisory firms recommended “no” votes on more than 10% of the companies it rates. The affirmative votes may be partially attributed to a number of proactive steps the companies took — including rewriting their Compensation Discussion & Analysis (CD&A) to be “plain English,” increasing their dialogue with shareholders and amending components of their compensation programs before their annual meetings to respond to concerns from proxy advisory firms and shareholders.

The Act also requires companies to adopt a compensation clawback policy, applies stricter independence standards for compensation committees, expands executive compensation disclosures, and increases independence considerations for compensation consultants, among other provisions. As of December 2011, the SEC has not released final rules on these issues. The companies will need to address in the 2012 proxies as to how they considered the results of the 2011 say on pay votes.

Directors would be well-served to understand a company’s broader compensation policies and discuss whether these policies appropriately layer in risk considerations and long-term corporate stability.

PwC perspective “The Dodd-Frank Act left us with many unanswered questions. For example, how will clawback policies become operational? When will they be triggered? How deep in the organization do they go? We will have to wait for the SEC's rules to be issued in order to fully understand the Act's impact." —Catherine Bromilow, Partner, Center for Board Governance

Learn what PwC has to say about executive compensation:

• PwC's BoardroomDirect: Update on current board issues, Spring 2011: Trends in say on pay voting
• PwC's To the point: Current issues for board of directors: What to expect in the second year of say on pay - Winter 2012
• PwC's 2012 Current developments for directors: Finding direction in uncertain times -- Governance developments: The say on pay experience: year one, December 2011
• PwC's 10 Minutes on the boardroom agenda: Paying attention to say on pay and executive compensation, November 2011
• PwC's HRS Insights: SEC Releases Proposed Rule on Listing Standards for Compensation Committees
• PwC's BoardroomDirect: Update on current board issues, Spring 2011: SEC proposes rules on comp committees and their advisors
• PwC's HRS insights: Federal Reserve issues proposed guidance on incentive compensation policies

Additional information about executive compensation:

• NACD's BoardVision: 2011 Proxy Season: Implications of Say on Pay Votes
• NACD: BoardVision: PwC on Corporate Governance: Say on pay
• SEC final rules on say on pay
• ISS: 2012 Corporate Governance Policy Updates and Process
• SEC: SEC proposes rules requiring listing standards for compensation committees and compensation consultants
• Weil Gotshal: Dodd-Frank Act update: SEC proposes rules regarding compensation committees and their advisors