Legislative Update: Dodd-Frank and Pension Relief Acts

1. Dodd-Frank Act

I put together a short presentation that outlines the executive compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (below).

Generally, the executive compensation provisions apply to all public companies. However, there is at least one that only applies to covered financial institutions (the one subjecting such companies to enhanced compensation structure reporting and prohibitions).

Having discussed these provisions with a few folks at the Equilar ExecutiveCompensation Summit earlier this month, here are the provisions that will likely be the most burdensome for companies:

• The requirement to disclose median total annual compensation for all employees (other than the CEO)-total compensation is defined as in the proxy disclosure rules for purposes of the Summary Compensation Table. So, in effect, companies will need to fill out a summary compensation table (or at least determine the amounts that would be disclosed in that table) for every employee! Needless to say, this will be a massive undertaking and cost companies quite a bit to assemble.

• Developing and implementing a clawback policy-there are many open questions left by Dodd-Frank, so we'll have to wait to see how the SEC fills things in.  But as it stands now, drafting a clawback policy will be a bit of a challenge given the language of the Act, for example, how would the Act's language apply to stock options? You couldn't really be able to determine what the stock price would have been absent the restatement triggering the clawback, so what happens?

• Say on pay coupled with elimination of broker votes-could mean the first year of mandatory say on pay for all companies becomes a bit of a nail biter while everyone tries to figure out how things will work and how to ensure a sufficient favorable vote on companies' compensation disclosed in the proxy.

• For covered institutions, they'll have to wait a bit longer to see how the appropriate Federal regulators come down on compensation structures.  Given the report of the Federal Reserve on large, complex banking organizations, I think it is safe to assume that these organizations' compensation designs will be transformed once again.

Effective dates for the provisions are all over the map from immediately effective upon enactment, to having a delay of 6-, 9- or 12-months after enactment. It sounds like the House and Senate have ironed out their differences on this Act and the President is expected to sign it as soon as both houses of Congress pass it, which is expected to occur as soon as July 4^th. So some of these provisions (most notably say on pay) most likely will be effective for the 2011 proxy season.

I hope you find the presentation helpful.  If you have any questions or would like to discuss implications, just let me know.

2. Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010

This Act was signed into law by President Obama on Friday, June 25. Among other things, it could ultimately have an impact on standard equity vesting provisions. Why?

Under this Act, the required funding of pension plans will be increased in any year by the amount of "excess employee compensation" it pays that year, plus the amount of any extraordinary dividends and redemptions.

"Excess employee compensation" is defined as the aggregate amount includible in income for any employee for any plan year over $1 million. Also included in this $1 million amount are assets set aside or reserved during the year to pay nonqualified deferred compensation using a trust or similar arrangement, or transferred to such a trust/arrangement by a plan sponsor to pay deferred compensation to an employee.

But, certain amounts are excluded from the definition of "excess employee compensation," including "any amount includible in income with respect to the granting after February 28, 2010, of service recipient  [employer] stock (within the meaning of section 409A) that, upon such grant, is subject to a substantial risk of forfeiture (as defined under section 83(c)(1)) for at least 5 years from the date of such grant." In other words, stock options, restricted stock and certain other stock-based compensation granted after February 28, 2010 with at least a 5-year vesting schedule will be excluded from the definition of "excess employee compensation." 

Thus, to the extent companies want to ensure that their pension funding obligations are minimized, they could adopt 5-year vesting for equity awards to ensure they are excluded from the definition of "excess employee compensation" for purposes of the funding requirements.

A link to the status page with a copy of the enrolled act as passed by House and Senate:

http://www.thomas.gov/cgi-bin/query/z?c111:H.R.3962: