Executive Compensation Regulation - White Papers
|Approval Date||Effective Date||Compliance Date|
|February 2, 2011||April 4, 2011||April 4, 2011|
White papers addressing executive compensation regulation.
- 1 Council of Institutional Investors: Wall Street Pay: Size, Structure and Significance for Shareowners
- 2 The Conference Board Task Force on Executive Compensation
- 3 Ethics Resource Center:Ethical Leadership and Executive Compensation
- 4 Executive Compensation Regulation - White Paper - Evaluation of Dodd-Frank Act Executive Compensation Provisions Using IDEC Project Principles
- 5 References
This paper, which was prepared by Paul Hodgson, Senior Research Associate, with Greg Ruel, Advisory Services Manager, and Michelle Lamb, Research Associate, The Corporate Library, investigates the nature and significance for investors of the size and structure of executive compensation at major U.S. financial institutions. The study compared pre-crisis and post-crisis compensation practices of financial institutions with those of large non-financial companies. Among the findings in the study:
- Little or no Wall Street compensation was linked to long-term future performance measures. This contrasts with compensation at many non-financial companies, where incentive pay was awarded for hitting long-term performance targets.
- The lack of long-term performance measurement on Wall Street and high absolute levels of compensation likely helped to fuel excessive risk-taking.
- While Wall Street compensation has improved post-crisis, with such changes as clawback provisions, longer deferral periods, and an increase in equity-based compensation, none of the banks in the study has addressed adequately the importance of tying compensation to long-term value growth.
- Non-U.S.-based financial entities have been more aggressive in altering the compensation issue than U.S.-based financial institutions.
The study concludes with suggestions as to potential remedies, such as filing shareholder proposals, and lobbying Congress for more effective reforms.
From the white paper:
"The task force believes that executive compensation executed correctly, in furtherance of a company’s business strategy and shareholder value and consistent with the company’s values, is essential to the economic health of America’s business sector. It has provided guiding principles for setting executive compensation, which, if appropriately implemented, are designed to restore credibility with shareholders and other stakeholders. The following summarizes these principles:
- Compensation programs should be designed to drive a company’s business strategy and objectives and create shareholder value, consistent with an acceptable risk profile and through legal and ethical means. To that end, a significant portion of pay should be incentive compensation, with payouts demonstrably tied to performance and paid only when performance can be reasonably assessed.
- Total compensation should be attractive to executives, affordable for the company, proportional to the executive’s contribution, and fair to shareholders and employees, while providing payouts that are clearly aligned with actual performance.
- Companies should avoid controversial pay practices, unless special justification is present.
- Compensation committees have a critical role in restoring trust in the executive compensation setting process and should demonstrate credible oversight of executive compensation. To effectively fulfill this role, compensation committees should be independent, experienced, and knowledgeable about the company’s business.
- Compensation programs should be transparent, understandable, and effectively communicated to shareholders. When questions arise, boards and shareholders should have meaningful dialogue about executive compensation."
The white paper expands upon these five principles, and offers guidelines for the design and implementation of executive compensation programs.
From the white paper:
"Specific flaws that now appear evident include:
- Incentive targets that were too easy to attain;
- Incentives encouraged high-risk strategies to meet short-term targets, but without sufficient regard for long-term impact or penalty for subsequent reverses;
- Poor design rewarded executives for riding the tide of market rallies even when the company under performed its peers;
- Incentive terms were adjusted in mid-stream so that CEOs were rewarded even when missing their targets;
- Penalties such as clawbacks were lacking when short-term gains were reversed or misconduct occurred;
- Incentives were based only on financial metrics without regard to other elements of leadership; and
- There was inadequate disclosure, including complicated compliance documents that hid potentially objectionable arrangements in an ocean of legalese.
But identifying the flaws is not enough. Somebody must impose solutions." The white paper goes on to highlight the keys to the design of fair compensation plans.
Executive Compensation Regulation - White Paper - Evaluation of Dodd-Frank Act Executive Compensation Provisions Using IDEC Project Principles
This checklist provides a snap-shot of the potential impact of the Dodd-Frank Act on executive compensation, looking at issues such as:
- Mandatory say-on-pay votes
- Mandatory clawbacks
- Pay equity
- Pay vs. Performance Disclosure
In summary, the paper states that "the Dodd-Frank executive compensation provisions may result in improved alignment with shareholders, greater accountability to shareholders and more transparency; however, the provisions may impose significant cost in terms of executive engagement, motivation and positive risk-taking."