Executive Compensation Under The Dodd-Frank Act

We recently presented a broad overview of the regulatory structure for the Banking and Financial Industry under the Dodd-Frank Act. Click here to see prior article. In this installment, we want to describe the new rules on executive compensation.

The Act’s compensation provisions apply to publicly-owned companies and financial institutions with assets of $1 Billion or more. The compensation provisions, like most other portions of the Act are far from complete; they will require adoption of multiple regulations to implement them.

The Act does not set rigid rules concerning compensation amounts. The Act does mandate that, beginning six (6) months after its effective date, subject companies must hold a non-binding shareholder vote on compensation of its executives and then again at least every three (3) years. Every six (6) years, the shareholders get to vote on whether to hold their non-binding vote every 1, 2 or 3 years. Shareholders also get non-binding votes on golden parachutes for executives.

Compensation decisions will be made by the company’s compensation committees which must be made up of independent directors. The committee is to retain compensation consultants, advisers and legal counsel. Future regulations will cover in detail rules for hiring these advisers.

Perhaps one provision which is particularly prickly is that requiring companies to have “clawback” policies enabling the company to recover compensation paid to executives who were “overpaid” in a period for which accounting adjustments are made. Clawback rights would include the power to recover from executives who are no longer employees and they would reach back three (3) years. These provisions will be implemented through policies to be adopted by the securities exchanges on which subject companies are listed and which are then approved by the SEC. The SEC will also be required to issue regulations regarding complete disclosure of any link between executive compensation and the company’s financial results. In the next nine (9) months, regulations will be prescribed to prohibit compensation policies that encourage inappropriate risk to the corporation’s financial health.

In the next report, we plan to discuss the impact of the Act on Community Banks. Stay tuned for that important report.

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Categories: Bankruptcy & Banking Law, Dodd-Frank Act