Reform Bill Mandates Say on Pay

The financial reform bill would require companies to adopt "say on pay" and put a host of other executive-comp disclosures into effect.

While the Dodd-Frank Wall Street Reform and Consumer Protection Act is mostly about reforming banks and other companies in the financial-services industry, there are some dramatic new mandates for public companies across all industries buried deep in the 2,000-plus page document.

Offering shareholders a so-called say on pay, or vote on executive compensation, is perhaps the most prominent of those mandates. According to the bill, which is a compromise between the House of Representatives and the Senate but must still pass both houses, companies must offer their shareholders both the vote on pay, which is nonbinding, and a chance next proxy season to vote on how often they want to take the vote — every year, every two years, or every three years.

Assuming the bill passes as is, all public companies will also be required to have a clawback policy regarding how they revoke previously awarded performance-based compensation when a financial restatement is necessary. They will also have to better disclose the relationship between executive pay and performance, as well as the ratio between the CEO’s pay and the pay of the average worldwide employee. In addition, all public companies will have to adopt policies banning executive officers from hedging or otherwise betting against their company stock holdings, something most companies already prohibit.

Many of the details of the potential rules remain fuzzy and are subject to further rule-making by the Securities and Exchange Commission. Already, though, it appears that many of the measures, contained in Sections 951-956 of the bill, will create a fair amount of work for companies. “There are a litany of questions companies will have to struggle with in the next six months,” says Steve Seelig, senior executive compensation consultant at Towers Watson.

Say on pay is likely one of those, according to a survey Towers Watson ran this month. The survey found that only about 12% of companies consider themselves very well prepared for say on pay, with another 6% either offering it currently or already planning to roll it out. The bulk of respondents, 46%, are only “somewhat prepared,” and 22% say they don’t know where their company stands.

While the notion of say on pay has been in the works for years, so far only about 80 companies offer it. Some critics point out that many shareholders don’t want it, with majorities rejecting the opportunity this year at AT&T, Johnson & Johnson, Dow Chemical, and UnitedHealth, among others. Investors who oppose it generally believe the measure is too binary, and that more-qualitative discussions with company management and board members are more appropriate. There’s also some concern that investors will rely too heavily on proxy advisory services rather than their own analysis.

However, this past proxy season showed that shareholders who do vote are no longer simply rubber-stamping proposals. Several companies, including Motorola, Occidental Petroleum, and KeyCorp, saw their shareholders reject their executive-pay packages. Such votes are nonbinding, but generally spark intense discussions and possible changes at companies when shareholders voice disapproval.

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