Treasurers with a role in equity comp administration should monitor post-Dodd-Frank rulemaking.
While other provisions of Dodd-Frank have gotten the bulk of attention, the executive compensation elements are not insignificant and will impact all publicly-traded US companies of size.
Given treasury’s role in helping to shape equity comp policy and execution, the rulemaking called for in the new law is worth following. Of particular interest may be the rulemaking for hedging equity compensation.
Disclosures involving director and employee hedging
As noted in a recent Hot Topics briefing by Deloitte, Dodd-Frank calls for the SEC to issue rules “requiring disclosure in the proxy materials of whether employees and directors are allowed to hedge the value of any equity securities granted to the director or employee or that are otherwise owned by the director or employee.” No timeline for creating such rules is specified; however, the prospect of such disclosures should be considered for future equity comp policies.
Deloitte, for example, suggests that the provision might cause companies to restrict purchases of hedging instruments by directors and employees to protect them against a fall in company share value. They may then offer employees and directors additional compensation to make up for the loss of hedging ability; or, seek other methods to make up for their downside exposure.
Along with overall comp
Disclosures on comp hedging must also be weighed in the context of shareholder say-on-pay provisions and additional disclosures of executive compensation required under the new law. Dodd-Frank, as Deloitte has noted, requires companies to submit compensation plans for named executive officers to a non-binding shareholder vote once every three years.
A similar non-binding shareholder vote must also occur (at least once every six years) to help determine if such shareholder reviews of compensation should occur every one, two or three years. Deloitte outlines several steps companies can take to prepare for shareholder “say-on-pay.” These include creating an internal working team drawing from IR, legal, finance and HR to devise ways to better interact with major shareholders concerning company compensation programs. Treasurers involved in equity comp may want to consider being part of such a team.
Dodd-Frank also requires the SEC to amend its proxy statement rules on comp disclosures in annual proxies or any solicitation materials for annual shareholder meetings. Such disclosures should include: (1) information about the relationship between pay and financial performance, to include changes in total shareholder return and compensation actually paid; and (2) the dollar amount of median annual total compensation for all employees, excluding the CEO; and separately, annual compensation for the CEO, along with the ratio of CEO total compensation to the employee median total compensation.
Treasurers with comp responsibilities should also be on the lookout for other new rules affecting comp policy. For example, Dodd-Frank calls for new policy mandates on the recovery of “excess” incentive compensation. While proxy statements already require disclosure of clawback provisions, this has resulted in some companies voluntarily adopting policies that go beyond those required by SOX. According to Deloitte, more will do so once the SEC issues its guidance in response to Dodd-Frank. There are also a number of limitations for financial intuitions that could foreshadow broader comp restriction initiatives.