Updated on July 21, 2010
The Restoring American Financial Stability Act (H.R. 4173) is a sweeping financial regulatory reform bill signed into law on July 21, 2010.
Also known as the "Dodd-Frank Act" after its chief congressional sponsors (Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank), the law includes a say-on-pay provision that will give shareholders of publicly traded U.S. corporations a nonbinding vote on executive pay. (To learn more, see the SHRM Online article Less Freedom to Pay: Executive Comp After Financial Regulatory Reform.)
Relatively few U.S. companies are well-prepared to put their executive pay programs up to a say-on-pay shareholder vote, although many are taking steps to get ready if, as is widely expected, the legislation becomes law, according to a survey by consultancy Towers Watson.
The Towers Watson survey found that only 12 percent of respondents said they are very well-prepared for the say-on-pay legislation, while 46 percent said they were somewhat prepared. Just under one-fourth of respondents (22 percent) didn’t know if their companies were ready.
“Given the amount of work companies will need to do to adapt to life in a say-on-pay environment, it’s noteworthy that relatively few companies feel they are well-prepared,” said Andrew Goldstein, a leader in Towers Watson’s Executive Compensation business, in a statement about the survey results. ”Companies understand that they’ll need to do more than simply describe their pay programs in their proxies and are beginning to take meaningful steps so that they are prepared.”
When asked what actions they are taking or planning in preparation for the say-on-pay legislation, 69 percent said they were identifying potential executive pay issues and concerns in advance, while 60 percent said they were improving the Compensation Discussion & Analysis sections of their proxy reports to better explain the executive pay program’s rationale and appropriateness for the company.
Influence of Proxy Advisors
In addition, many companies indicated they are engaging with proxy advisors (44 percent) to discuss areas of concern, meeting with key institutional shareholders (29 percent) and preparing a formal communication plan (23 percent).
The Towers Watson survey also found that more than one-half (59 percent) of respondents believe that proxy advisory firms have substantial influence on executive pay decision-making processes in U.S. companies. However, 42 percent said that guidelines established by proxy advisory firms have had no or minimal impact to this point on the design of their own executive compensation programs.
“The influence of proxy advisory firms and institutional shareholders on executive compensation programs has increased steadily over the past few years and is likely to increase further in a say-on-pay world,” Goldstein said. “As a result, we believe companies should be prepared for even closer scrutiny of their executive pay plans and policies, and will need to step up their communications with these groups through direct dialogue and even better proxy disclosure to be assured of strong support. Companies that fail to develop effective say-on-pay strategies and to take steps now to make their compensation programs shareholder-friendly risk becoming lightning rods in this new environment.”
The Towers Watson Executive Say-on-Pay Flash Survey was conducted in June 2010, with responses from 251 U.S. publicly traded and privately held corporations representing a cross section of industries.
Stephen Miller is an online editor/manager for SHRM.
Less Freedom to Pay: Executive Comp After Financial Regulatory Reform, SHRM Online Compensation Discipline, July 2010
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