What Compensation Pros need to do about Dodd Frank NOW

1October 21, 2010High Performance Equity Compensation

Dodd-Frank Wall Street Reform

and Consumer Protection Act

Presented to the Bay Area Compensation Association (BACA) 10/21/2010

What should Compensation Professionals be doing right now?

Action Steps for Executive Compensation ©2010-Performensation - all rights reserved

©2010-Performensation - all rights reserved

2

The following presentation discusses the highlights of the executive compensation provisions contained in the

Dodd-Frank Wall Street Reform and Consumer Protection Act.

This presentation is based on the final version of the bill dated July 16, 2010 and posted on the Government Printing

Office’s Web page: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf (under Title IX—Investor Protections and Improvements to

the Regulation of Securities Sections 951–957 and 971–972).

President Obama signed the Dodd-Frank Act into law on July 21, 2010To protect the confidential and proprietary information included in

this material, it may not be disclosed or provided to any third parties without the prior consent of Performensation Consulting LLC.

This presentation was created in cooperation with: Ed Hauder, Senior Advisor, Exequity

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4173enr.txt.pdf


3

Today’s PresenterDan WalterPresident and CEOPerformensationEmail: [email protected]: (415) 625-3406Web: www.performensation.com

mobile: +1-917-734-4649Twitter: @performensation Skype: performensationLinkedIn: www.linkedin.com/in/danwalter

Compensation Cafe Blog: www.compensationcafe.comPresentation Library:www.slideshare.net/performensationEquity Compensation Experts: www.equitycompensationexperts.groupsite.com

High Performance Compensation

mailto:[email protected]

http://www.performensation.com/

http://www.linkedin.com/in/danwalter

http://www.compensationcafe.com/

http://www.slideshare.net/performensation

http://www.equitycompensationexperts.groupsite.com/



4

About the Speakers: Dan Walter

President and CEO of Performensation

Broad experience: Dan has more than 15 years of experience assisting companies with both executive and broad-based compensation programs. He provides end-to-end solutions for private and public companies in both the United States and abroad. His clients have ranged from entrepreneurial start-ups to established Fortune 100 companies providing him with a unique perspective on compensation issues.

Incentive compensation futurist: Dan is frequently recognized for being an industry leader in compensation design, philosophy, and execution. He provides solutions that start with your corporate culture and end with your corporate success. Performensation’s solutions also include GEMS, the only tool designed to automate the tracking of complex goals against equity plans.

Deep expertise: Dan’s expertise includes equity compensation, executive programs, performance-based pay, and talent management issues. His experience with these programs includes diagnosis, design, communication, administration, and reporting. Dan has experience with all forms of equity, including stock options, restricted shares and units, and stock purchase and performance-based programs. Dan’s past clients include: Yahoo, Google, IBM, Microsoft, JDSU, ION Geophysical, Redback Networks, BGI (now BlackRock), and others.

Industry educator: Dan is currently writing a book on performance-based equity and contributing to another. He is a frequently requested speaker at compensation, stock administration, human resources, and accounting events, covering a wide range of topics. Dan is the founder of Equity Compensation Experts, the largest networking group for professionals who touch equity compensation, a regular contributor to the Compensation Café blog (rated one the top 10 talent management blogs on the web), and a co-producer of the ShareComp 2010 virtual conference

www.performensation.com415-625-3406


5

ACTION ITEM: SAY ON PAY PROVISIONS

What you need to do:

Create say on pay (MSOP) stakeholder team

Determine your say on pay philosophy and approach:

Aggressive:

Actively move to more performance-based pay

Move to annual shareholder votes

Passive:

Wait for others in your peer group to announce their position

Push for vote triennially

Understand what your shareholders want




6



Understand how your company has linked pay to company has linked pay to performance in the past

Explain anomalies

Calculate full potential payout given the expected and projected combination and projected combination of corporate and stock price performance

Perform similar comparisons for peers




7


How an experienced compensation consultant can help:

Evaluate content and presentation of executive compensation disclosures

Review alignment of pay to performance

Reach out to your shareholders to find out what they think and identify any “hot button” issues that could impact their vote on say on pay

Review past recommendations from ISS, Glass Lewis, and others regarding companies in your peer group

Review how your your compensation plan, design, and program compare to the policies of your institutional shareholders




8

ACTION ITEM: GOLDEN PARACHUTE VOTES


Review change-in-control (CIC) provisions in all compensation programs and ensure that they represent your current philosophy

Determine go-forward philosophy in regard to golden parachutes




9

Determine current golden parachute liability assuming a CIC event in the next 12 months; use different deal price assumptions to get a feel for the sensitivity of your golden parachutes to the deal price

Determine Top 5 NEO golden parachute liability as a percentage of deal price and premium over current and 200-day average stock price

Perform same calculations for your peers

Review compensation arrangements that may be subject to a separate shareholder vote if a transaction were to occur; ensure the terms are consistent with intent, and disclosure is covered by a management say on pay vote

ACTION ITEM: GOLDEN PARACHUTE VOTES





10

ACTION ITEM: COMPENSATION COMMITTEE INDEPENDENCE


Review independence standard for audit committee members

Review how the audit committee independence standards might apply to your current compensation committee members

Review independence of compensation committee members and adjust as needed

Move to switch out non-independent directors before next applicable proxy period

Committee charter may need to be updated, but wait for SEC to issue rules




11

ACTION ITEM: COMPENSATION COMMITTEE INDEPENDENCE

(You’re on your own)




12

ACTION ITEM:CONSULTANTS AND ADVISERS INDEPENDENCE


Determine what independence standard the compensation committee will apply to its advisers

Create a list of qualified compensation consultants who do not provide any other services to the company

Review current compensation consultants and other committee advisers for independence as related to the new rules

Review with your compensation committee possible advisers that may suit their needs

Determine whether the compensation committee wants to change any of its advisers as a result of reviewing their independence

Review the independence factors to be issued by the SEC




13

Performensation is a completely independent consulting firms

We can provide assistance with your compensation programs

We can provide assistance in evaluating the independence of your current consultants and advisers

ACTION ITEM:CONSULTANTS AND ADVISERS INDEPENDENCE





14

ACTION ITEM: EXECUTIVE COMPENSATION DISCLOSURES


As part of say on pay review and philosophy, document relationship between pay and performance

Determine the tools, time, and budget required to calculate employee annual compensation in the same manner as required for the Summary Compensation Table (SCT)

Provide input to the SEC now [http://www.sec.gov/spotlight/regreformcomments.shtml]

Contact your Congressman and Senators


http://www.sec.gov/spotlight/regreformcomments.shtml

http://www.sec.gov/spotlight/regreformcomments.shtml



15

Evaluate whether a historical look at pay versus performance of your company and its peers would assist the development of disclosure and/or message to shareholders

Determine current ratio of CEO pay to employee pay

Determine if any other pay ratios should be considered for disclosure purposes, i.e., CEO to other NEOs, CEO as a % of total compensation expense, etc.

Review peer group ratios, using compensation survey data as a guideline

Evaluate if your ratio is “media worthy”. Will news outlets report on your ratio as a positive or negative?

ACTION ITEM: EXECUTIVE COMPENSATION DISCLOSURES





16

ACTION ITEM: CLAWBACK PROVISION: RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY


Evaluate your current philosophy on clawback provisions

Can your current position be communicated as supporting the new regulations?

If not, what changes must be made to comply?

Determine if those changes can be made (some may require significant legal work or plan redesign)

Identify potential legal issues (wage laws, etc.)




17

Review your clawbacks to determine any necessary changes

Set out a plan to get necessary changes implemented so your clawbacks comply with the new requirements

Create clawback “best practices” guidelines that can be applied to current and prospective programs

ACTION ITEM: CLAWBACK PROVISION: RECOVERY OF ERRONEOUSLY AWARDED COMPENSATION POLICY





18

ACTION ITEM: DISCLOSURE REGARDING EMPLOYEE AND DIRECTOR HEDGING


Review current hedging positions with all executives, directors, and employees

Evaluate the disclosure requirements for each individual’s current transactions

Determine the modifications, if any, that each individual must make




19

Define a clear anti-hedging policy as part of your insider trading policy

Create a communication program explaining the variants of hedging and how your anti-hedging policy works

ACTION ITEM: DISCLOSURE REGARDING EMPLOYEE AND DIRECTOR HEDGING





20

ACTION ITEM: ENHANCED COMPENSATION STRUCTURE REPORTING FOR FINANCIAL COMPANIES

What you can do:

If you are not a financial company, disregard for now, but keep an eye on this so you know what some shareholders might ask you to adopt if the changes are viewed as beneficial by shareholders

If you are a covered financial company with more than $1 billion in assets:

Start evaluating your compensation programs now

Determine how you will communicate the structure of these arrangements to determine:

Possibility of providing excessive compensation fees or benefits

Risk profile and association with possible material loss to the company




21

Prepare initial approach to modifications such as:

Mandatory holding periods and stock ownership guidelines

A significant portion of compensation to be deferred

Introducing an absolute metric governing payouts of any performance-based compensation subject to relative performance measures, e.g., relative total shareholder returns

ACTION ITEM: ENHANCED COMPENSATION STRUCTURE REPORTING FOR FINANCIAL COMPANIES





22

ACTION ITEM: VOTING BY BROKERS

What you can do:

Evaluate voting standards and determine impact

Determine whether more aggressive outreach to shareholders is warranted to gain support of retail shares




23

Evaluate employee equity compensation accounts to determine if the individuals can and do vote their shares

If you have a strong employee ownership culture, assist with the creation of a communication program that explains the importance of employee voting

Determine the potential need for a proxy solicitation campaign, based on the likelihood of un-voteable, broker-held shares

ACTION ITEM: VOTING BY BROKERS





24

ACTION ITEM: CORPORATE GOVERNANCE

What you can do:

Keep your eyes open for final decisions regarding Proxy Access

Draft out the rationale for your company having the Chairman/CEO structure it has

Why was this structure selected?

What does it enable the company to do?

How does this structure impact your company’s corporate governance?

Did you consider alternatives?

If so, why were they not selected?

How often does the company review its Chairman/CEO structure?

Does this structure increase or decrease your company’s risk profile?




25


What you can do:

Compensation Risk Factor

Calculate the impact of goals being met early goals being met early

What is the impact of lost retention power if executive held shares are executive held shares are sold

Determine the true weighting of goals related weighting of goals related to STI and LTI and its potential impact on your corporate risk profile corporate risk profile.

Where possible express this in dollars or in $/share.




26

Update you when final proxy access rules are available

Provide insight into rationale for peer group Chairman/CEO structure






27

Short-term

Opening of communication lines in both directions

Conservative voting until more data is gathered

Long-Term

Clearer guidelines on linking pay to performance

Consolidation around a few key metrics as indicators of performance

Addition of experts well versed in compensation

WHAT WILL CHANGE:

Shareholders




28

Short-Term

Focus on “poster-child” companies to serve as examples (good and bad)

General acceptance of all but the most egregious pay programs

NO votes where BOD has discretion to pay out on under-performance

Long-Term

Continued outcry when small percentage of companies have unusually high compensation

Focus on Pay Vs. Performance, not CEO Pay Ratios

WHAT WON’T CHANGE:

Shareholders




29

Short-term

Increased communication to justify pay structure

More companies using multiple compensation consultants

Growth in performance-based equity

Smaller companies more likely to utilize additional outside expertise’

Reduction of lucrative Golden Parachute programs

Long-Term

Less fear of Say on Pay as votes become more predictable

Return to historical Golden Parachute policies

Evolution of Clawbacks as they are tested in practical application

WHAT WILL CHANGE:

Compensation




30

Short-Term

Use of time-based equity

Will simply will add new performance equity

Base-compensation philosophy

Unless it has already been called out by shareholders

Long-Term

Growth in Executive Pay levels, especially CEO

Pay frequency

WHAT WON’T CHANGE:

Compensation



31

We’ve probably been out of time for a while,

but…any Questions?


32

Today’s PresenterDan WalterPresident and CEOPerformensationEmail: [email protected]: (415) 625-3406Web: www.performensation.com

mobile: +1-917-734-4649Twitter: @performensation Skype: performensationLinkedIn: www.linkedin.com/in/danwalter

Compensation Cafe Blog: www.compensationcafe.comPresentation Library:www.slideshare.net/performensationEquity Compensation Experts: www.equitycompensationexperts.groupsite.com

High Performance Compensation

mailto:[email protected]


http://www.linkedin.com/in/danwalter

http://www.compensationcafe.com/

http://www.slideshare.net/performensation



Business

What Compensation Pros need to do about Dodd Frank NOW