Executive Compensation Regulation

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Gavel.png FINAL RULES: Shareholder Approval of Executive Compensation and Golden Parachute Compensation Approved at SEC Open Meeting, January 25, 2011.
Listing Standards for Public Company Boards and Compensation Advisers Approved June 20, 2012.
Timeline, Pay Versus Performance, SEC
Proposal Date Comment Deadline Final Rule Issue
April 29th, 2015 TBA TBA
Timeline, Pay Ratio Disclosure, SEC
Proposal Date Comment Deadline Final Rule Issue Compliance Date
October 1, 2013 December 2, 2013 August 5, 2015 First fiscal year after Jan 2017
Dodd-Frank Timeline, Incentive-Based Compensation Arrangements, SEC
Proposal Date Re-proposed Rule Comment Deadline
April 14, 2011 May 6, 2016 July 22, 2016
Dodd-Frank Timeline, Shareholder Approval of Executive Compensation and Golden Parachute Compensation, SEC
Approval Date Effective Date Compliance Date
February 2, 2011 April 4, 2011 April 4, 2011
Dodd-Frank Timeline, Listing Standards for Compensation Committees, SEC
Final Rule Issue Effective Date Compliance Date, Rule Changes Compliance Date, Disclosure
June 27, 2012 July 27, 2012 September 25, 2012 January 1, 2013

Title IX of the Dodd-Frank Act aims to update and enhance investor protection and improve protections in U.S. securities markets. Among its provisions are five sections related to executive compensation:

  • Section 951, which requires advisory votes of shareholders about executive compensation and golden parachutes; VIEW FINAL RULE
  • Section 952, which requires disclosure about the role of, and potential conflicts involving, compensation consultants; VIEW FINAL RULE
  • Section 953, which requires disclosure on compensation practices such as pay-for-performance and ratios between CEO and median compensation; VIEW PROPOSED RULE
  • Section 954, which aims to require compensation claw-back policies; and
  • Section 955, which requires disclosure about whether company directors are permitted to hedge decreases in market value of the company's stock. VIEW PROPOSED RULE

In 2011 and 2012 the Securities and Exchange Commission (SEC) first proposed and then began finalizing rules related to executive compensation. In the fall of 2013, the commission proposed a rule requiring the disclosure of the ratio CEO pay to that of the median employee. <ref>Corporate Governance Issues, Including Executive Compensation Disclosure and Related SRO Rules. U.S. Securities and Exchange Commission. Retrieved on June 22, 2012.</ref>

Listing Standards for Clawing Back Erroneously Awarded Executive Compensation[edit]

Proposed Rule July 1, 2015

On July 1st, 2015 The Securities and Exchange Commission proposed a new rule that would require exchanges to make rules regarding the clawing back of erroneously awarded executive compensation. The proposed rule requires that exchanges have recovery standards and new disclosure requirements for companies.

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Pay Versus Performance[edit]

Proposed Rule April 29th, 2015

On April 29th, 2015 the Securities and Exchange Commission released a new proposed rule on executive compensation. The proposed rule would require that the relationship between executive pay and financial performance be disclosed by proxy or information statement in a "clear manner". This will include adjustments for pensions and equity awards. This proposed rule is to implement Section 14(i) of the Securities Exchange Act of 1934 as added by section 953(a) of Dodd-Frank.

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Disclosure of Hedging by Employees, Officers and Directors[edit]

On February 9, 2015, the SEC approved a proposed rule that would enhance corporate disclosure of company hedging policies for directors and employees, as mandated by Section 955 of the Dodd-Frank Act.[1]

The proposed rules would require disclosure in proxy and information statements for the election of directors and apply to companies subject to the federal proxy rules, including smaller reporting companies, emerging growth companies, business development companies, and registered closed-end investment companies with shares listed and registered on a national securities exchange

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Listing Standards for Compensation Committees[edit]

Final Rules, June 2012
On June 20, 2012, the Securities and Exchange Commission approved a final rule requiring securities exchanges to adopt listing standards for compensation committees and compensation advisers. Under the new statute, Rule 10C-1, national securities exchanges are directed to establish listing standards that, among other things, require each member of a listed issuer’s compensation committee to be a member of the board of directors and to be “independent.” The rule will become effective 30 days after it is published in the Federal Register.<ref>SEC Adopts Rule Requiring Listing Standards for Compensation Committees and Compensation Advisers. Securities and Exchange Commission. Retrieved on June 21, 2012.</ref>

Regarding compliance, each national securities exchange and association must provide to the SEC, within 90 days, proposed rule change submissions associated with 10C-1 compliance. The exchanges must have final rules in place within one year. Additionally, related changes must be disclosed in proxy or information sheets by the first shareholder meeting at which directors will be elected on or after January 1, 2013.

The rules were first proposed on March 30, 2011.

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Shareholder Approval of Executive Compensation and Golden Parachute Compensation[edit]

On January 25, 2011, the Securities and Exchange Commission (SEC) adopted rules requiring approval from shareholders for executive compensation and "golden parachute" arrangements mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The new rules will require:

  • Say-on-pay votes required under the Dodd-Frank Act must occur at least once every three years, beginning with the first annual shareholders' meeting taking place on or after Jan. 21, 2011.
  • A "frequency" vote must take place at least once every six years in order to allow shareholders to decide how often they would like to be presented with the say-on-pay vote.
  • A company must disclose on an SEC Form 8-K how often it will hold the say-on-pay vote.
  • Companies also are required to provide additional disclosure regarding "golden parachute" compensation arrangements with certain executive officers in connection with merger transactions.<ref>SEC Adopts Rules for Say-on-Pay and Golden Parachute Compensation as Required Under Dodd-Frank Act. U.S. Securities and Exchange Commission. Retrieved on January 25, 2011.</ref>
  • There will be a two year exemption until January 2013 for small businesses (public float of less than $75 million).
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Incentive-Based Compensation Arrangements[edit]

Proposed Rules

  • Incentive-based compensation annual reports would be required of qualifying institutions.
  • Excessive compensation encouraging inappropriate risk-taking on the part of executives and/or resulting in losses by the institution would be prohibited.
  • An additional threshold of $50 billion for certain institutions would be added, and requirements such as the "deferral of incentive-based compensation of executive officers and approval of compensation for people whose job functions give them the ability to expose the firm to a substantial amount of risk" would be enforced.
  • Compliance policies and procedures regarding incentive-based compensation would be created and enforced.

Annual reports would include the following information:

  1. "A narrative description of the components of the firm’s incentive-based compensation arrangements;
  2. A succinct description of the firm’s policies and procedures governing its incentive-based compensation arrangements; and
  3. A statement of the specific reasons as to why the firm believes the structure of its incentive-based compensation arrangement will help prevent it from suffering a material financial loss or does not provide covered persons with excessive compensation."
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Pay Ratio Disclosure[edit]

On September 18, 2013, the SEC proposed a rule that would require companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. The rule is a mandate from section 953 of the Dodd-Frank Act.

The rule entered the Federal Register on October 1, 2013. The deadline for public comment is December 2, 2013.

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