Viewpoint July 16, 2010, 4:10PM EST

Dodd-Frank: What It Means for Comp and Governance

Most companies will feel the impact of the law's "say on pay" provisions first. After that, they'll have to wait for SEC clarification

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The Dodd-Frank law will affect executive compensation and corporate governance starting in 2011 with the "say on pay" provision. Other elements will come into play as the SEC issues new regulations. Here in summary are key provisions of the law, along with a brief overview of how the changes will affect compensation programs and overall board governance.

Investor Voting

• Commencing in 2011, most companies must hold a nonbinding shareholder "say on pay" vote on compensation for executives whose salary and other benefits are disclosed in the proxy statement. This vote must be held no less frequently than every three years. Institutional investment managers are required to report annually on how they voted. A separate nonbinding shareholder vote must be held at least every six years (commencing in 2011) on whether the say-on-pay vote should occur annually, every two years, or every three years.

• In the event of a change-in-control transaction, a separate say-on-pay vote is required on any compensation arrangements for named executives that relate to the transaction (e.g., golden parachute payments), unless those arrangements have been subject to a prior say on pay vote.

Independence

• Compensation committee members must generally meet independence standards that consider (among other things) the nature and sources of their compensation and relationship to the company.

• The compensation committee is to be directly responsible for the appointment, compensation, and oversight of any compensation consultant or other advisers whom the committee retains. The company must provide funding to pay for such advisers.

• In selecting external advisers, the compensation committee must take into account factors affecting independence that are to be identified under rules to be issued by the SEC. There is no requirement that the advisers actually be independent, but the proxy statement must disclose whether the committee has obtained the advice of a compensation consultant, whether the consultant's work raised any conflict of interest, and if so, the nature of the conflict and how it is being addressed.

Other Major Provisions

• Proxy-statement executive compensation disclosure must include information related to whether employees or board members are permitted to engage in transactions that hedge the value of company shares they own, a chart comparing executive compensation to absolute total shareholder return for the past five years, and an analysis of the ratio of CEO annual compensation to the median total compensation of all other employees.

• Companies must implement a "clawback" policy for recovery of erroneously paid compensation, including stock options, in the event of certain required accounting restatements. The policy applies to current and former executives, must reach back for at least three years prior to the date the accounting restatement is required, and does not require fraud or malfeasance for the clawback provisions to become applicable.

• Broker discretionary voting of shares held by their customers will not be permitted in elections of directors, say on pay, or other significant matters.

• The proxy statement must disclose the reasons why the company has chosen to have the same person or different persons serve as board chair and chief executive officer.

• Financial institutions will be required to disclose to their appropriate Federal regulator information regarding the structure of incentive-based compensation arrangements. The regulators are required to issue rules prohibiting any types of incentive-based compensation arrangements that encourage inappropriate risks (i) by providing excessive compensation to an executive officer, employee, director, or principal shareholder; or (ii) that could lead to material financial loss to the financial institution.