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Will Congress push for more say on executive pay?
Faced with public outcries about excessive executive compensation during and after the 2008 recession, the US Congress enacted the Dodd-Frank Act in an attempt to regulate the pay of executive officers of public companies, especially CEOs. Taxand USA discusses the issues corporations face when rewarding their CEOs.
The first element of Dodd-Frank to go into effect was the say-on-pay (SOP) rule, which gave shareholders a non-binding vote on their company's executive compensation programme. Effective for 3 years, there is little evidence that the SOP vote has accomplished anything more than a noticeable increase in the length of the compensation disclosure section of proxies and in the fees paid to advisors. In fact, shareholders have approved in excess of 90% of the compensation programmes proposed by public companies since the legislation took effect. This is hardly the resounding disavowal that some might have anticipated or hoped for.
Many public companies have eliminated or reduced golden parachute protections, withheld some long-time perquisites and reduced the use of stock options and supplemental executive retirement plans (SERPs). While the decision to modify these benefits is understandable in today's difficult climate, there are sound arguments in each case as to why the affected benefit should continue to play an integral role in compensation programmes. For example experience has shown that golden parachute protections do motivate executives to work to maximise shareholder value in takeover situations. Similarly SERPs provide executives with certainty that they will be able to cope with retirement (and motivate succession planning) for a relatively low cost.
The next round of Dodd-Frank changes requires public companies to publish the ratio the CEO's compensation bears to the compensation of the company's median employee. The flaws inherent in this provision (cost of gathering the information; difficulty in integrating non-US based employees into the calculation; lack of adjustment for geography or sector) have been addressed by numerous commentators since it was enacted. The Securities and Exchange Commission (SEC) attempted to mitigate some of the principal criticisms but could not address the rule itself, which will require companies to devote significant time and resources to compliance.
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Companies (and their boards of directors and compensation committees) clearly face increasingly complex issues in structuring executive compensation and benefit programmes to minimise public discontent, while still acting to attract and retain top executive talent. Regardless of the political climate or public outcry, the best approach is to maximise the return to reward executives for actions that, in the opinion of the board or the compensation committee, are most likely to maximise share value in the long term.