The Dodd-Frank Act directly impacts compensation provisions of the law and has adopted the Securities and Exchange Commission (SEC) rules. Shareholder votes on executive compensation (Section 951) and independence of compensation committees (Section 952) have been affected. There’s been consistent movement in finalizing this Act; however, some of the rules are still in the process of being settled.
The Federal Reserve recently re-proposed the executive compensation rule. This rule applies to banks $1B and greater which requires Level 1 & Level 2 institutions to record all “senior executive” and “risk taker’s” incentive-based compensation, disclose the compensation arrangements, and be subject to a 7-year clawback provision. Level 1 = more than $250 billion in assets; Level 2 = $50 billion to $250 billion in assets; Level 3 = Regulators have discretion over requirements.
Rules affected by the Dodd-Frank Act:
1) Pay Versus Performance Disclosure, Section 953(a):
- This rule helps shareholders gain a better understanding of how executive compensation compares to company performance.
- This rule provides information on compensation to increase public companies say-on-pay votes. The proposal highlights a new form of realized pay verses reported pay and, over several years, it will be assessing the differences of company and peer group total shareholder return.
2) Pay Ratio Disclosure, Section 953(b):
- This rule promotes accountability with shareholders.
- This rule requires public companies to divulge the CEO’s total compensation to the company.
- Status of rulemaking: Rule finalized by the SEC August 5, 2015 with implementation postponed to January 1, 2017 or later. The first 2017 fiscal year compensation disclosure to come in proxy statements filed in 2018.
3) Clawbacks, Section 954:
- This rule requires set policies to revoke incentive-based compensation from top executives for public companies. If financial statements are inaccurate, the earnings must be restated to ensure accurate compensation.
- Status of rulemaking: Final rules in Fall 2015. Effective date and listing rule created by stock exchanges anticipated late 2016 or early 2017.
4) Enhanced Compensation Structure Reporting, Section 956:
- This rule pertains to financial intuitions that have at least $1 billion in assets. It serves as a codification of principles from the Guidance on Sound Incentive Compensation Policies. The purpose is to ensure compensation long-term risks and rewards are balanced, risk management and effective controls are compatible, and corporate governance is supported.