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
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
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
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
(This article was first published by ThomsonReuters'
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