U.S. firms prepare pay plans for Dodd-Frank

Wed Feb 23, 2011 2:18pm EST

NEW YORK, Feb. 23 (Westlaw Business) - The U.S. Securities and Exchange Commission will not finish proposing its corporate governance rules until later this year, but companies from Starbucks Corp. (SBUX.O) to Schlumberger (SLB.N) aren't waiting.

Via timely disclosures, companies are getting an early start on compliance with last year's Dodd-Frank regulatory overhaul, even while proxy uncertainty remains. The SEC has also delivered rules delivered relating to Dodd-Frank mandated advisory votes for say-on-pay and golden parachutes. Suffice it to say that, executive compensation remains a particularly hot-button topic this year.

The SEC still has its work cut out for it to enact the full Dodd-Frank agenda for governance. The agency will not even have proposed rules regarding clawback policies and disclosure of pay-for-performance, pay ratios and hedging by employees and directors until sometime between this August and December.

But many companies, getting ahead of the curve, have begun to consider and plan for these changes. They are adopting "clawback" policies to recover compensation later deemed as a result of special circumstances to have been "excessive." They are also disclosing their policies on hedging of equity compensation and preparing for pay-for-performance disclosure.

The Dodd-Frank Act mandates that the SEC issue new rules on clawbacks. Specifically, Section 954 of the law, styled "Recovery of Erroneously Awarded Compensation Policy," directs national securities exchanges to prohibit the listing of any company that does not have adequate clawback policies in two respects.

First, companies must have a policy providing for disclosure of incentive-based compensation that is based on financial information required to be reported under the securities laws. Second, they must institute a clawback policy for incentive-based compensation, in the event of accounting restatements caused by material problems with financial reporting.

Starbucks, Fortune Brands FO.N and Pantry Inc (PTRY.O). are just a few of the companies that instituted new clawback policies during the 2010 fiscal year.

Several companies identify Dodd-Frank as the impetus for their new clawback policies. For example, the board of the diagnostic imaging company DGT Holdings Corp. recently approved changes to its 2007 Incentive Stock Plan. These changes include the addition of a clawback provision. The amended incentive plan requires shareholder approval, and the company explained in its proxy that:

"A clawback provision was added to reflect recent Dodd-Frank Wall Street Reform and Consumer Protection Act legislation providing for reimbursement of annual incentive payments to executive officers in certain instances when the financial statements of a [DGT Holdings Corp] are restated"

Somewhat similarly, Fortune Brands recently adopted a new clawback policy and stated in its proxy that:

"The Compensation Committee will reevaluate and, if necessary, revise the Company's clawback policy to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act once the rules implementing the clawback requirements have been finalized by the SEC."

Other companies, such as Tyco Electronics (TEL.N) and circuit manufacturer Analog Devices Inc ADI.N., are taking a "wait and see" approach to clawbacks. Tyco, for instance, states in its proxy that during 2010 its board:

"determined to adopt a clawback policy once the SEC has adopted rules to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and (has) included in all executive officer fiscal 2011 incentive award agreements a provision indicating that such awards are subject to the clawback policy to be adopted."

In a similar vein, Analog Devices states in its proxy that it expects to implement a clawback policy in fiscal 2011 in accordance with Dodd-Frank, but it wants to wait until the SEC issues guidance on clawbacks.

Hedging of equity compensation by executive officers and directors is also mandated for disclosure under Dodd-Frank.

These rules will not be proposed until later this year, but many companies are nonetheless mentioning their policies in this year's proxy.

Dodd-Frank's section 955 calls for the SEC to issue rules, "requiring disclosure in the proxy materials of whether employees and directors are allowed to hedge the value of any equity securities granted to the director or employee or that are otherwise owned by the director or employee."

Possibly in preparation for the impending rule change, oil field services provider Schlumberger and technology company Synopsys, among other companies, have added disclosures stating that their executives are prohibited from hedging their exposure to company shares. These companies and their peers will most likely need to add much more detailed disclosure of these polices in their 2012 proxies.

Pay-for-performance is a particularly nebulous third item on the SEC's regulatory to-do list under Dodd-Frank. The act requires public companies to disclose, "information that shows the relationship between executive compensation actually paid and the financial performance of the issuer."

It also requires the SEC to enact rules that mandate the disclosure of the total annual compensation paid to all employees other than the CEO, the total annual compensation of the CEO, and the ratio between these two figures.

These rules are considered to be some of the more amorphous rules that the SEC is charged with enacting. Some companies, such as Eaton Corp (ETN.N)., have already included in their proxy statements tables suggested by Center on Executive Compensation to clearly disclose a company's pay-for-performance measures. It remains to be seen how the SEC plans to enact the new disclosure rules.

Staggered implementation and ad-hoc implementation will ensure that executive compensation remains a hot topic for quite some time. The SEC is due to propose later this year rules regarding clawbacks policies and disclosure of pay-for-performance, pay ratios and hedging by employees and directors. In the interim, companies look set to take early steps to prepare for these impending changes on a case-by-case basis.

(This article was first published by ThomsonReuters' Westlaw Business Currents, a leading provider of legal analysis and news on governance, transactions and legal risk. Visit Westlaw Business Currents online at currents.westlawbusiness.com.)

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