Key issues: Executive compensation and say on pay

In the third year of the Dodd-Frank Act, it is expected there will be some more Securities and Exchange Commission (SEC) rulemaking related to executive compensation. Also, it is expected in 2013 there will be more progress in the communication between shareholders and boards regarding advisory say on pay votes.

In 2013, new SEC Chair Elisse Walter and the rest of the commission may finalize new rules for executive compensation clawback policies and executive/worker pay ratio.

In the past year, both the New York Stock Exchange (NYSE) and NASDAQ added listing standards for compensation committee member independence and committee advisor independence requirements pursuant to the Dodd-Frank Act. In defining independence, both exchanges refer to the source of compensation paid to the director, including consulting fees, advisory fees, or other compensation, and director affiliations with the company, any subsidiaries of the company, or any affiliates of subsidiaries of the company.

As say on pay enters its third year, the proxy advisor Institutional Shareholder Services (ISS) in its 2013 US voting guidelines has:

• Revises its say-on-pay analysis to refine the peer group selection methodology and, at least for large-cap companies, incorporates a “realizable pay” analysis into the qualitative evaluation of pay-for-performance;
• Extends the say-on-golden parachute analysis to existing and legacy arrangements, as well as new or renewed arrangements; and
• Assesses, on a case-by-case basis, shareholder proposals to link executive compensation to environmental and social metrics.

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. An understanding of last year’s negative say on pay shareholder voting is an important step as well as evaluating any particular compensation provisions that concern proxy advisors and shareholders. In turn, proxy disclosures and external communications should be designed to address controversial areas.

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:

• BoardroomDirect – November 2012: New listing standards for compensation committees for more information
• 2012 Annual Corporate Directors Survey.
• BoardroomDirect, June 2012: Compensation clawback rules due soon
• BoardroomDirect, June 2012: Say on pay votes slightly ahead of 2011
• Global executive pay study - Making executive pay work: The psychology of incentives
• BoardroomDirect: Update on current board issues, Spring 2011: Trends in say on pay voting

Additional information about executive compensation:

• SEC adopts rule requiring listing standards for compensation committees and compensation advisers
• Weil Alert: Dodd-Frank Update: SEC requires disclosure of compensation consultant conflicts and directs stock exchanges to propose independence standards for compensation committees and their advisers (June 2012)