What Compensation Pros need to do about Dodd Frank NOW

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What Compensation Pros need to do about Dodd Frank NOW

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Dodd Frank contains many provisions that will impact the design, process and communication of executive compensation. This presentation discusses what compensation professionals should be doing......

Dodd Frank contains many provisions that will impact the design, process and communication of executive compensation. This presentation discusses what compensation professionals should be doing now to get prepared.

Presented to BACA (Bay Area Compensation Association 10/21/2010)

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  • 1. Dodd-FrankWall Street Reform and Consumer Protection ActPresented to the Bay Area Compensation Association (BACA) 10/21/2010
    What should Compensation Professionals be doing right now?
    Action Steps for Executive Compensation
    October 21, 2010
    ©2010-Performensation - all rights reserved
    High Performance Equity Compensation
    1
  • 2. The following presentation discusses the highlights of the executive compensation provisions contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act. This presentation is based on the final version of the bill dated July 16, 2010 and posted on the Government Printing Office’s Web page: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf (under Title IX—Investor Protections and Improvements to the Regulation of Securities Sections 951–957 and 971–972).President Obama signed the Dodd-Frank Act into law on July 21, 2010
    To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the prior consent of Performensation Consulting LLC.
    This presentation was created in cooperation with:
    Ed Hauder, Senior Advisor, Exequity
    ©2010-Performensation - all rights reserved
    2
  • 3. Today’s Presenter
    Dan Walter
    President and CEO
    Performensation
    Email: dwalter@performensation.com
    Phone: (415) 625-3406
    Web: www.performensation.com
    mobile: +1-917-734-4649
    Twitter: @performensation
    Skype: performensation
    LinkedIn: www.linkedin.com/in/danwalter
    Compensation Cafe Blog: www.compensationcafe.com
    Presentation Library:
    www.slideshare.net/performensation
    Equity Compensation Experts: www.equitycompensationexperts.groupsite.com
    High Performance Compensation
    ©2010-Performensation - all rights reserved
    3
  • 4. About the Speakers: Dan Walter
    President and CEO of Performensation
    Broad experience: Dan has more than 15 years of experience assisting companies with both executive and broad-based compensation programs. He provides end-to-end solutions for private and public companies in both the United States and abroad. His clients have ranged from entrepreneurial start-ups to established Fortune 100 companies providing him with a unique perspective on compensation issues.
    Incentive compensation futurist: Dan is frequently recognized for being an industry leader in compensation design, philosophy, and execution. He provides solutions that start with your corporate culture and end with your corporate success. Performensation’s solutions also include GEMS, the only tool designed to automate the tracking of complex goals against equity plans.
    Deep expertise: Dan’s expertise includes equity compensation, executive programs, performance-based pay, and talent management issues. His experience with these programs includes diagnosis, design, communication, administration, and reporting. Dan has experience with all forms of equity, including stock options, restricted shares and units, and stock purchase and performance-based programs. Dan’s past clients include: Yahoo, Google, IBM, Microsoft, JDSU, ION Geophysical, Redback Networks, BGI (now BlackRock), and others.
    Industry educator: Dan is currently writing a book on performance-based equity and contributing to another. He is a frequently requested speaker at compensation, stock administration, human resources, and accounting events, covering a wide range of topics. Dan is the founder of Equity Compensation Experts, the largest networking group for professionals who touch equity compensation, a regular contributor to the Compensation Café blog (rated one the top 10 talent management blogs on the web), and a co-producer of the ShareComp 2010 virtual conference
    ©2010-Performensation - all rights reserved
    4
  • 5. Create say on pay (MSOP) stakeholder team
    Determine your say on pay philosophy and approach:
    Aggressive:
    Actively move to more performance-based pay
    Move to annual shareholder votes
    Passive:
    Wait for others in your peer group to announce their position
    Push for vote triennially
    Understand what your shareholders want
    Action Item: Say on Pay ProvisionsWhat you need to do:
    5
    ©2010-Performensation - all rights reserved
  • 6. Understand how your company has linked pay to company has linked pay to performance in the past
    Explain anomalies
    Calculate full potential payout given the expected and projected combination and projected combination of corporate and stock price performance
    Perform similar comparisons for peers
    Action Item: Say on Pay ProvisionsWhat you need to do:
    6
    ©2010-Performensation - all rights reserved
  • 7. Evaluate content and presentation of executive compensation disclosures
    Review alignment of pay to performance
    Reach out to your shareholders to find out what they think and identify any “hot button” issues that could impact their vote on say on pay
    Review past recommendations from ISS, Glass Lewis, and others regarding companies in your peer group
    Review how your your compensation plan, design, and program compare to the policies of your institutional shareholders
    Action Item: Say on Pay ProvisionsHow an experienced compensation consultant can help:
    7
    ©2010-Performensation - all rights reserved
  • 8. Review change-in-control (CIC) provisions in all compensation programs and ensure that they represent your current philosophy
    Determine go-forward philosophy in regard to golden parachutes
    Action Item: Golden Parachute VotesWhat you need to do:
    8
    ©2010-Performensation - all rights reserved
  • 9. Determine current golden parachute liability assuming a CIC event in the next 12 months; use different deal price assumptions to get a feel for the sensitivity of your golden parachutes to the deal price
    Determine Top 5 NEO golden parachute liability as a percentage of deal price and premium over current and 200-day average stock price
    Perform same calculations for your peers
    Review compensation arrangements that may be subject to a separate shareholder vote if a transaction were to occur; ensure the terms are consistent with intent, and disclosure is covered by a management say on pay vote
    Action Item: Golden Parachute VotesHow an experienced compensation consultant can help:
    9
    ©2010-Performensation - all rights reserved
  • 10. Review independence standard for audit committee members
    Review how the audit committee independence standards might apply to your current compensation committee members
    Review independence of compensation committee members and adjust as needed
    Move to switch out non-independent directors before next applicable proxy period
    Committee charter may need to be updated, but wait for SEC to issue rules
    Action Item: Compensation Committee IndependenceWhat you need to do:
    10
    ©2010-Performensation - all rights reserved
  • 11. Action Item: Compensation Committee Independence(You’re on your own)
    11
    ©2010-Performensation - all rights reserved
  • 12. Determine what independence standard the compensation committee will apply to its advisers
    Create a list of qualified compensation consultants who do not provide any other services to the company
    Review current compensation consultants and other committee advisers for independence as related to the new rules
    Review with your compensation committee possible advisers that may suit their needs
    Determine whether the compensation committee wants to change any of its advisers as a result of reviewing their independence
    Review the independence factors to be issued by the SEC
    Action Item:Consultants and Advisers IndependenceWhat you need to do:
    12
    ©2010-Performensation - all rights reserved
  • 13. Performensation is a completely independent consulting firms
    We can provide assistance with your compensation programs
    We can provide assistance in evaluating the independence of your current consultants and advisers
    Action Item:Consultants and Advisers IndependenceHow an experienced compensation consultant can help:
    13
    ©2010-Performensation - all rights reserved
  • 14. As part of say on pay review and philosophy, document relationship between pay and performance
    Determine the tools, time, and budget required to calculate employee annual compensation in the same manner as required for the Summary Compensation Table (SCT)
    Provide input to the SEC now [http://www.sec.gov/spotlight/regreformcomments.shtml]
    Contact your Congressman and Senators
    Action Item: Executive Compensation DisclosuresWhat you need to do:
    14
    ©2010-Performensation - all rights reserved
  • 15. Evaluate whether a historical look at pay versus performance of your company and its peers would assist the development of disclosure and/or message to shareholders
    Determine current ratio of CEO pay to employee pay
    Determine if any other pay ratios should be considered for disclosure purposes, i.e., CEO to other NEOs, CEO as a % of total compensation expense, etc.
    Review peer group ratios, using compensation survey data as a guideline
    Evaluate if your ratio is “media worthy”. Will news outlets report on your ratio as a positive or negative?
    Action Item: Executive Compensation DisclosuresHow an experienced compensation consultant can help:
    15
    ©2010-Performensation - all rights reserved
  • 16. Evaluate your current philosophy on clawback provisions
    Can your current position be communicated as supporting the new regulations?
    If not, what changes must be made to comply?
    Determine if those changes can be made (some may require significant legal work or plan redesign)
    Identify potential legal issues (wage laws, etc.)
    Action Item: Clawback Provision: Recovery of Erroneously Awarded Compensation PolicyWhat you need to do:
    16
    ©2010-Performensation - all rights reserved
  • 17. Review your clawbacks to determine any necessary changes
    Set out a plan to get necessary changes implemented so your clawbacks comply with the new requirements
    Create clawback “best practices” guidelines that can be applied to current and prospective programs
    Action Item: Clawback Provision: Recovery of Erroneously Awarded Compensation PolicyHow an experienced compensation consultant can help:
    17
    ©2010-Performensation - all rights reserved
  • 18. Review current hedging positions with all executives, directors, and employees
    Evaluate the disclosure requirements for each individual’s current transactions
    Determine the modifications, if any, that each individual must make
    Action Item: Disclosure Regarding Employee and Director HedgingWhat you need to do:
    18
    ©2010-Performensation - all rights reserved
  • 19. Define a clear anti-hedging policy as part of your insider trading policy
    Create a communication program explaining the variants of hedging and how your anti-hedging policy works
    Action Item: Disclosure Regarding Employee and Director HedgingHow an experienced compensation consultant can help:
    19
    ©2010-Performensation - all rights reserved
  • 20. If you are not a financial company, disregard for now, but keep an eye on this so you know what some shareholders might ask you to adopt if the changes are viewed as beneficial by shareholders
    If you are a covered financial company with more than $1 billion in assets:
    Start evaluating your compensation programs now
    Determine how you will communicate the structure of these arrangements to determine:
    Possibility of providing excessive compensation fees or benefits
    Risk profile and association with possible material loss to the company
    Action Item: Enhanced Compensation Structure Reporting for Financial CompaniesWhat you can do:
    20
    ©2010-Performensation - all rights reserved
  • 21. Prepare initial approach to modifications such as:
    Mandatory holding periods and stock ownership guidelines
    A significant portion of compensation to be deferred
    Introducing an absolute metric governing payouts of any performance-based compensation subject to relative performance measures, e.g., relative total shareholder returns
    Action Item: Enhanced Compensation Structure Reporting for Financial CompaniesHow an experienced compensation consultant can help:
    21
    ©2010-Performensation - all rights reserved
  • 22. Evaluate voting standards and determine impact
    Determine whether more aggressive outreach to shareholders is warranted to gain support of retail shares
    Action Item: Voting by BrokersWhat you can do:
    22
    ©2010-Performensation - all rights reserved
  • 23. Evaluate employee equity compensation accounts to determine if the individuals can and do vote their shares
    If you have a strong employee ownership culture, assist with the creation of a communication program that explains the importance of employee voting
    Determine the potential need for a proxy solicitation campaign, based on the likelihood of un-voteable, broker-held shares
    Action Item: Voting by BrokersHow an experienced compensation consultant can help:
    23
    ©2010-Performensation - all rights reserved
  • 24. Keep your eyes open for final decisions regarding Proxy Access
    Draft out the rationale for your company having the Chairman/CEO structure it has
    Why was this structure selected?
    What does it enable the company to do?
    How does this structure impact your company’s corporate governance?
    Did you consider alternatives?
    If so, why were they not selected?
    How often does the company review its Chairman/CEO structure?
    Does this structure increase or decrease your company’s risk profile?
    Action Item: Corporate GovernanceWhat you can do:
    24
    ©2010-Performensation - all rights reserved
  • 25. Compensation Risk Factor
    Calculate the impact of goals being met early goals being met early
    What is the impact of lost retention power if executive held shares are executive held shares are sold
    Determine the true weighting of goals related weighting of goals related to STI and LTI and its potential impact on your corporate risk profile corporate risk profile.
    Where possible express this in dollars or in $/share.
    Action Item: Corporate GovernanceWhat you can do:
    25
    ©2010-Performensation - all rights reserved
  • 26. Update you when final proxy access rules are available
    Provide insight into rationale for peer group Chairman/CEO structure
    Action Item: Corporate GovernanceHow an experienced compensation consultant can help:
    26
    ©2010-Performensation - all rights reserved
  • 27. Short-term
    Opening of communication lines in both directions
    Conservative voting until more data is gathered
    Long-Term
    Clearer guidelines on linking pay to performance
    Consolidation around a few key metrics as indicators of performance
    Addition of experts well versed in compensation
    WhatWill Change:
    Shareholders
    27
    ©2010-Performensation - all rights reserved
  • 28. Short-Term
    Focus on “poster-child” companies to serve as examples (good and bad)
    General acceptance of all but the most egregious pay programs
    NO votes where BOD has discretion to pay out on under-performance
    Long-Term
    Continued outcry when small percentage of companies have unusually high compensation
    Focus on Pay Vs. Performance, not CEO Pay Ratios
    WhatWON’T Change:
    Shareholders
    28
    ©2010-Performensation - all rights reserved
  • 29. Short-term
    Increased communication to justify pay structure
    More companies using multiple compensation consultants
    Growth in performance-based equity
    Smaller companies more likely to utilize additional outside expertise’
    Reduction of lucrative Golden Parachute programs
    Long-Term
    Less fear of Say on Pay as votes become more predictable
    Return to historical Golden Parachute policies
    Evolution of Clawbacks as they are tested in practical application
    WhatWill Change:
    Compensation
    29
    ©2010-Performensation - all rights reserved
  • 30. Short-Term
    Use of time-based equity
    Will simply will add new performance equity
    Base-compensation philosophy
    Unless it has already been called out by shareholders
    Long-Term
    Growth in Executive Pay levels, especially CEO
    Pay frequency
    WhatWON’T Change:
    Compensation
    30
    ©2010-Performensation - all rights reserved
  • 31. We’ve probably been out of time for a while, but…any Questions?
    ©2010-Performensation - all rights reserved
    31
  • 32. Today’s Presenter
    Dan Walter
    President and CEO
    Performensation
    Email: dwalter@performensation.com
    Phone: (415) 625-3406
    Web: www.performensation.com
    mobile: +1-917-734-4649
    Twitter: @performensation
    Skype: performensation
    LinkedIn: www.linkedin.com/in/danwalter
    Compensation Cafe Blog: www.compensationcafe.com
    Presentation Library:
    www.slideshare.net/performensation
    Equity Compensation Experts: www.equitycompensationexperts.groupsite.com
    High Performance Compensation
    ©2010-Performensation - all rights reserved
    32