Dodd-Frank and CEO pay ratio reporting may not disappear, and new roles may be required of the compensation committee
There are lots of signals coming from the new administration in Washington, but wholesale changes to laws such as Dodd-Frank aren’t likely, at least not overnight. That doesn’t mean compensation committees shouldn’t be prepared and agile. Compensation committees must set priorities based on the most likely issues they will have to address, and here is guidance on where to place bets and allocate time and resources on key issues:
Dodd-Frank won’t likely be going away any time soon. Talk about repealing Dodd-Frank made effective campaign fodder, and as a result compensation committees have expended considerable time determining how best to comply with associated regulations.
But the realities of the legislative process suggest that we shouldn’t expect wholesale repeal of this broad, far-reaching act; instead, anticipate the softening of specific executive pay rules that were formally adopted and inaction on rules that were only proposed. Thus, we predict that the SEC’s proposals on clawback policies and pay-versus-performance disclosures will not be implemented, and that companies will continue developing their own fault-related clawback and pay-versus-performance sought by institutional investors.
While President Trump signed an executive order on Feb. 3 regarding “core principals” relating to rolling back Dodd-Frank, legislation (likely a new version of the proposed Financial CHOICE [Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs] Act being shepherded through the House by U.S. Rep. Jeb Hensarling) will be needed to accomplish much of this agenda. However, the potential for a filibuster in the Senate will likely result in delay and compromise.
In any case, one particular provision, say-on-pay, is here to stay. Now embedded in governance culture, this provision was demanded by investors and advisory firms, and it’s unrealistic to think this power to weigh in on executive pay will be rescinded. Be prepared to comply with all required disclosures under Dodd-Frank and sit tight until President Trump’s nominee for SEC chair, Jay Clayton, is approved by the Senate, which should spark actions by the agency and clarify priorities.
Hedge your bets on the CEO pay ratio disclosure rule. We have been advising clients to comply with the CEO pay ratio provision of Dodd-Frank which, while onerous and unpopular with comp committees, is law. Companies first would be expected to furnish disclosures starting in 2018, based on data from the prior year. However, acting SEC Chair Michael Piwowar has asked companies to submit comments that outline “any unexpected challenges” they anticipate as they plan to comply. He has also asked the SEC’s staff to “reconsider the implementation of the rule” to determine “whether additional guidance or relief is appropriate.” With nothing definite, and Trump’s SEC Chair nominee still awaiting confirmation, our current advice to compensation committees is to do the needed prep work to be in compliance should this rule remain in effect.
In one poll, 45% of respondents at client companies were at least “somewhat concerned” with understanding the steps needed to make the disclosure, according to a recent Korn Ferry Hay Group survey.
Comp committees can get up to speed by:
- Focusing on the key variable-CEO compensation for the past several years,
- Considering the process for determining the median employee compensation, including such factors as the number and location of non-US employees and whether there is a significant number of seasonal employees that could affect the date used for determining employees,
- Conducting a dry run with 2016 compensation data and a draft disclosure, and
- Creating a proactive communications plan which, if needed, would address possible consequences of CEO pay ratio disclosure to a range of stakeholder groups.
- Don’t count on a continued upward trajectory in the stock market. Be prepared with a narrative on executive pay and rewards. Investors ask fewer questions about executive compensation and rewards when the stock market is thriving. So far, that has been the case with the new administration, but experience tells us this can change quickly.
Since attracting and retaining the right leadership is the key to long-term growth for companies and their investors, boards should be ready to make a convincing case should the market shift downward and make investor pushback more likely. This communication capability is crucial with say-on-pay now such an integral part of the governance culture.
Make sure you have a well-vetted argument by first examining current executive pay programs to ensure that they can withstand scrutiny, scratching any out-of-line practices that could draw unneeded negative attention. Then plan to engage and communicate with key stakeholders to lead them through the logic of your pay programs and the need to employ fair, motivational pay strategies, regardless of shifts in the economy, if the company is to provide essential leadership.
Ensure your comp committee’s charter and membership are up to new challenges. Much is still uncertain regarding what the Trump administration’s regulatory demands will require from compensation committees, and the overall leadership development and compensation landscapes also continue to shift. Compensation committees will require greater agility to respond quickly to these changes, potentially adding new competencies, as we see compensation committees taking on broader duties related to talent management and succession planning.
In short, the responsibilities of compensation committees are increasingly linked to strategic priorities as pay and rewards are recognized as a critical link to accomplishing these goals. With that in mind, it may be time to reassess both your compensation committee’s charter – which may need to be revised to reflect new responsibilities — and the strengths of the directors who comprise the committee to make sure you have the best team in place to meet these growing challenges.
Irv Becker is Senior Client Partner and North American Leader, Executive Pay & Governance for Korn Ferry Hay Group.