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IZALE Financial Group

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What Is the Pay Ratio Rule & Why Should You Care?

12/9/2016

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By Greenberg Traurig, LLP from the AALU Washington Report

MARKET TREND:  The increased and sustained focus on executive compensation since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) likely will gain momentum in light of the impending requirement under Section 953(b) of Dodd-Frank that such companies disclose information comparing their CEO’s compensation to the median compensation of their other employees (the “pay-ratio rule”).

SYNOPSIS:   Although the disclosure under the pay-ratio rule for calendar-year reporting companies likely will not be required until the spring of 2018 when such companies file their proxy statements in respect of 2017, in light of the complexity and anticipated implications associated with the disclosure, companies are advised to begin formulating their implementation approach now.  The rules include flexibility on methodology with respect to identifying a median employee, and the approach to selecting a methodology that best fits the company is likely to vary due to multiple factors, including industry.
TAKE AWAYS:   Companies required to disclose under the pay-ratio rule should take the following steps:

  • Reporting companies are advised to begin discussing implementation approaches with their compensation committees well in advance of the time in which the 2017 proxy is prepared.  Thoughtful consideration should be given to the employee profile of the company and whether such profile is typical to the industry and/or the company’s peer group.  If the company or the compensation committee engages a compensation consultant, he or she may be in a position to provide data on models and methodologies found to be best suited to an industry to illustrate accurately the ratio and median employee compensation.

  • In many cases, companies may benefit from analyzing 2016 compensation to estimate the likely ratio, experimenting with different methodological approaches.  

  • Under the pay-ratio rule, a registrant is permitted to supplement the required disclosure with explanatory narrative discussion or additional ratios, provided that such additional disclosure is not misleading, is clearly identified, and is not presented with greater prominence than the require disclosure. Accordingly, thought should be given to a complementary narrative disclosure that will help round out for shareholders whether and how the ratio reflects the company’s pay philosophy, efficiency, and other similar considerations.

  • As with the introduction of any new and recurring disclosure, the manner of presenting the information and the methodology employed should be determined with an eye to consistency across disclosure years, as any change in approach in future years likely will trigger explanatory disclosure regarding the change.

  • Regardless of what methodology is ultimately chosen, companies should consider any potential implications indirectly resulting from the required disclosure (for example, if the employee population is unionized in whole or part, the disclosure may impact collective agreements, and in any event, may create employee relations concerns and/or disrupt periodic pay negotiations for those whose pay is below the median).

  • Companies may wish to stay apprised of developing positions within the institutional shareholder and proxy advisor communities regarding ratios that are deemed unacceptable or egregious.

MAJOR REFERENCES:    Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act; Item 402 of Regulation S-K of the U.S. Securities Act of 1933; Compliance & Disclosure Interpretations for Regulation S-K updated October 18, 2016.
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SEC’s Proposed Rules for Stock Exchanges to Adopt Policies Requiring Member Companies to “Clawback” Excess Incentive-Based Compensation

2/4/2016

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TOPIC:  Q&A - SEC’s Proposed Rules for Stock Exchanges to Adopt Policies Requiring Member Companies to “Clawback” Excess Incentive-Based Compensation.

MARKET TREND:  There continues to be serious concern over the compensation of certain public company executives.  The SEC’s proposed rules, stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, attempt to address the matter.

SYNOPSIS:  The SEC’s proposed rules define the issuers and executives to whom a compensation recovery policy must apply.  These rules specify the circumstances in which the recovery policy would be triggered, the compensation subject to recovery, and the methodology for determining the recoverable amounts.
 
TAKE AWAYS:  Listed (public company) issuers should review their existing clawback policies in light of the proposed rules.  While well-accepted compensation theories advocate tying compensation to a company’s financial performance, given the SEC’s proposed rules and the current market trend, issuers may wish to reduce the amount of compensation that is contingent upon the satisfaction of financial reporting measures, so as to reduce their executive officers’ exposure to clawback.  To the extent that compensation will be based on the achievement of financial reporting measures, per the proposed rules, the compensation awards should include explicit language to facilitate clawback, if required.
 
MAJOR REFERENCES:  SEC RELEASE NO. 33-9861 - PROPOSED RULE - “LISTING STANDARDS FOR RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION.”

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