COMPENSATION IN CONTEXT

September 15, 2009

The Executive Pay Crackdown Continues

While Congress is working on a bill to give
shareholders more say on pay, companies appear to be reining in excess on their own…….

Amid
the
recent explosion of proposals to limit and regulate executive
compensation, public-company senior executives and their boards of
directors face a
double whammy - new responsibilities for providing unprecedented levels
of disclosure about executive compensation in financial statements and
SEC
disclosure, while, at the same time, dealing with the very real
prospect of new constraints on their own pay.

During
the remainder of
September, the Senate is expected to take up a bill passed by the House
of Representatives that would require public companies to give their
shareholders a nonbinding "say on pay," and to do a better job
explaining how pay practices affect their overall level of
risk.

Large scale financial
institutions would face “special” scrutiny from federal regulators (as if the current levels of scrutiny could be ratcheted even
higher…) who would determine whether their incentive structures — even commissions — are "aligned with sound risk
management."

The
legislation builds on
Securities and Exchange Commission proposals (open for comment until
today, September 15) that include provisions for disclosing more to
shareholders
about the credentials of company directors, and about potential
conflicts of interest that exist for any independent compensation and
benefits
consulting firms advising the compensation committee of the board. The
SEC and other regulators would have nine months after enactment to
issue final
say-on-pay rules — making it unlikely that they will go into effect
during the 2009-2010 proxy season.

Regulators
have fought very
hard to get “meaningful” executive compensation data, and, as such,
companies can anticipate substantial changes to the compensation
discussion and analysis (“CD&A”) section of annual proxy statements.

In
addition to providing
even more granular tally sheet disclosure, the CD&A report would
also have to explain the “objectives” behind the structure of any
short- or long-term incentive plan(s) that might have an impact on the
company's risk management, with the idea being that the increased level
of
transparency will put the brakes on bad behavior.

However,
behaviors already
seem to be changing. For example, Swiss banking giant UBS recently
announced that it will delay management bonuses for three years “to
discourage short-term risk-taking”. It appears that momentum, with
regard to these types of actions, is increasing. The measures really
come as
no surprise to most senior executives and board members.

Whatever
the
effectiveness that these new measures may have, our government should
be navigating through these tricky waters very carefully. For the
regulators,
the challenge is to balance heavy-handed policymaking against the need
to treat well-run companies and their hard working executives and
employees
fairly.