Executive compensation and corporate governance update

by International Law Office, March 9th, 2011.

Shareholder ‘say on pay’ voting
Independence of members of compensation committees
Compensation committee advisers
Additional executive compensation disclosures
Clawbacks of incentive-based compensation
Hedging disclosure
Board structure disclosure

Enacted on July 21 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act contains significant executive compensation and corporate governance provisions applicable to public companies. This update summarises the key provisions that address executive compensation and corporate governance issues.

Shareholder ‘say on pay’ voting

Each public company must provide its shareholders with a separate non-binding vote to approve or reject the compensation of its officers as disclosed in the company’s proxy statements. The vote must be provided at least once every three years, with the frequency also subject to a shareholder vote. A non-binding vote for compensation is also required in connection with a change of control transaction. When a company seeks its shareholders’ approval for such a change, the company must disclose the terms, conditions and amounts of its officers’ compensation that are based on, or otherwise related to, the transaction. If not previously subject to a ‘say on pay’ vote, the compensation related to the transaction must be subject to a separate non-binding vote of the shareholders. While ‘say on pay’ votes are non-binding, directors will likely make significant efforts to avoid a negative vote through both shareholder outreach and proactive use of the compensation disclosure and analysis section of proxy materials.

Independence of members of compensation committees

While both the New York Stock Exchange and the NASDAQ stock market generally require members of a board’s compensation committee to be independent and provide definitions of ‘independence’ for this purpose, the act requires the national securities exchanges and associations to draft new rules that base independence on factors such as:

  • the source of each compensation committee member’s compensation (including any consulting, advisory or other fees paid to the compensation committee member by the company); and
  • whether the director is affiliated with the company, a subsidiary of the company or an affiliate of the company. (continue reading… )
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