EXPLAINING HOW C-SUITE COMPENSATION RELATES TO CORPORATE
PERFORMANCE IN 2011 PROXIES IS JUST THE BEGINNING.
Spotlight on Executive Pay
treasuryandrisk.com
THE CLOCK IS TICKING for companies to comply with the first Dodd-Frank re-
quirement concerning executive compensation. When they start sending out their
2011 proxies this spring, companies must include an explanation of how top execu-
tive officers’ pay tracks with the company’s performance. Companies are free to use
whatever calculations and formulas they want, since the Securities and Exchange
Commission will not publish a rule setting out metrics for this disclosure until after
analysis on their own, and they
need to start doing that now,
because different methodologies
lead to different results,” says
“pay equity” disclosure. Issuers
will have to disclose the median
total annual compensation of all
employees excluding the CEO,
the total annual compensation
of the CEO, and the ratio of the
two figures. The SEC has yet to
set an implementation date, but
companies expect that to kick in
for the 2012 proxy season.
Dan Pedrotty, the AFL-CIO’s
director of investment, says pay
equity will become the more im-
portant of the two metrics when
shareholders have their say on
pay. But Steve Bartlett, chair-
man of the Financial Services
Roundtable, calls the pay equity
measure “the silliest provision in
Dodd-Frank’s 2,300 pages.”
Dodd-Frank mandates that
compensation committees be
independent, with the intent to
make them tougher negotiators
of pay packages. However,
Charles Elson, a corporate gov-
ernance expert at the University
of Delaware, argues that the new
law will create problems by in-
suring committees are more
concerned with process—e.g.,
meeting SEC rules on committee
and consultant independence—
than with the substance of get-
ting the best pay package.
2011 proxies are mailed. But the
choice is fraught with risks be-
cause Dodd-Frank also mandates
that companies give shareholders
a nonbinding “say on pay” resolu-
tion in 2011.
Steve Seelig, executive compen-
sation counsel at Towers Watson
“From our perspective, each
company will need to do some
Research Center.
On the pay side, companies
might use the figure in the summary compensation table of
the proxy, although Seelig does
not think this is what Congress
was after. Using the compensation listed on executives’ W-2
forms is a better option, Seelig
says, but he favors using “pay
realizable,” which is the value
of all compensation, including
increases or decreases in equity
value, plus income from cashing
in options.
The performance measure
could be based on total share-
holder return, earnings per
share, or a blend of the two.
Dodd-Frank also mandates
a second, more controversial
Illustration by David Plunkert
Each company will need
to do some analysis on
their own, and they need
to start doing that now.
—to Wers WatsoN’s seeLiG
