Another good summary of the Dodd-Frank Bill - 2 July 2010

Executive Compensation Requirements in the
Dodd-Frank Regulatory Reform Bill

The
Dodd-Frank regulatory reform bill, which
recently passed the House, includes a number of executive
compensation reforms. The executive compensation provisions in the bill
include reforms to both SEC-reporting company disclosure and financial
institution specific disclosure.

The
Dodd-Frank reform bill expounds on current TARP
say-on-pay requirements and makes them generally applicable to
SEC-reporting companies. Under the reform bill, not less than once every
three years, SEC registrants must include in annual meeting proxy
statements a shareholder resolution on the compensation of executive
officers. In addition, not less than once every six years, SEC
registrants must have a shareholder vote to determine the frequency of a
vote on executive compensation by shareholders, which may occur, as
determined by shareholders, every one, two or three years.

Under the bill, SEC registrants must disclose golden parachute
agreements in a proxy statement where shareholders are asked to approve
an acquisition, merger, consolidation or proposed sale of substantially
all of the assets. The aggregate total compensation that may be paid in
such transaction, pursuant to a golden parachute agreement, must be
included in this disclosure and be submitted for shareholder approval in
a separate resolution.

Similar to the TARP say-on-pay
requirements, the say-on-pay and golden parachute resolutions applicable
to all SEC-reporting companies are not binding on SEC registrants or
directors. Institutional investors, however, will be required to
disclose annually how they voted on such disclosures. Although the bill
does not explicitly exclude certain registrants from these requirements,
the bill gives the SEC the authority to exempt certain registrants and
encourages the SEC to take into consideration whether these requirements
“disproportionately burden small issuers.”

Compensation Committees

The
Dodd-Frank reform bill addresses independence standards for compensation
committee members and gives the SEC authority to direct national
securities exchanges and national securities associations to set
requirements. As a result, registrants will be required to comply with
this requirement only if they are subject to the rules of an exchange or
securities association. The bill requires that all compensation
committee members must be independent directors, which is determined by
the source of a director’s compensation and affiliation with the
registrant.

The Compensation Committee, in its sole
discretion, may retain compensation consultants or advisors, including
legal advisors, and will also be responsible for oversight and
compensation. The bill expounds on the current proxy disclosure
requirements that went into effect for the 2010 proxy season, which
require the disclosure of compensation consulting services and fees.

Pay vs. Performance

To the extent a registrant has executive compensation tied to
its performance, it will be required to disclose in its proxy statement
the relationship between the compensation actually paid to executive
officers and the registrant’s financial performance. In addition to this
disclosure, registrants will be required to disclose the median annual
total compensation of all employees (excluding the CEO), the annual
total compensation of the CEO, and the ratio between the two. Although
this may be burdensome to some registrants, the bill does not provide
for an exemption, nor does it grant the SEC with the authority to set an
exemption.

Clawback

The Dodd-Frank bill requires the SEC to direct national
securities exchanges and national securities associations to require
listed registrants to have a policy on incentive compensation based on
financial information reportable under securities laws. Similar to
current requirements for TARP recipient institutions, in the event any
SEC registrant subject to the rules of an exchange or association is
required to make an accounting restatement, the registrant will be
permitted, pursuant to its policy, to recover, or “clawback,” any excess
compensation based on such erroneous financial information for a period
of three years.

Financial Institution Specific Reporting

The bill
requires financial institutions to disclose the structure of all
incentive-based compensation to federal banking regulators, which will
allow regulators to determine if such compensation is excessive or could
lead to a material financial loss. This is similar to the disclosure
that TARP recipient financial institutions must make to their primary
federal regulators and to the U.S. Department of the Treasury. This
provision in the Dodd-Frank bill, however, is only applicable to
financial institutions with a minimum of $1 billion in assets.

In addition to the executive compensation requirements above,
the Dodd-Frank bill requires SEC-reporting registrants to disclose
hedging securities held by employees or directors and used to offset a
decrease in the market value of its equity securities. The bill also
prohibits brokers from voting on executive compensation and uncontested
director elections, similar to the recent broker restrictions issued by
national securities exchanges and national securities associations.

Although many on the executive compensation requirements are
addressed in TARP specific requirements and the recently enacted proxy
disclosure requirements, the Dodd-Frank reform bill appears to expound
on current disclosure requirements and require, at a minimum, that all
SEC registrants, or financial institutions in certain cases, comply with
such provisions.