It is a good time to consider regulatory issues that will require decisions and action. Disclosure CEO pay regulatory issues pay ratios will begin to be implemented fiscal year 2018. The final regulations on pay for performance; mandatory clawbacks or hedging policy disclosure has yet to announced which allows companies some time to consider the implications.
Court cases alleging excessive pay have focused on whether plans that govern director pay include “meaningful limits,” suggesting that employers might want to consider what compensation level constitutes a “meaningful limit”, for example: a fixed formula, a dollar/share limit or another approach. Should there be different limits for different roles or a single cap for all directors?
Companies should consider thoroughly reviewing and document their pay-setting process, including how the board sets director pay and the role of peer group selection. Consider what is the optimal time to adopt a limit and should it be in the omnibus plan approved by shareholders and can the board simply adopt an amendment to that plan without shareholder approval. Also consider if shareholders should be asked to approve a new stand-alone plan solely for directors.
Compensation committees would be well served to start asking finance departments and their accounting firms to begin considering GAAP rule changes as part of the compensation planning process. The question becomes whether for 2016 grants, excluding the potential effect of changes in GAAP accounting on performance measurement will be enough to avoid unintended consequences.
Companies should think about their communication strategy sooner rather than later, as this could be a multiyear project for many companies. Communicating the CEO pay ratio will be important the ratio will be out there for all to see, including employees, customers, competitors, potential employees and the press.
The hedging regulations proposed by the SEC in 2015 require companies to disclose their adopted policy to shareholders. The regulations do not require any specific hedging policy, companies should consider adding or amending a policy, given the heightened shareholder focus.
Companies that have not already done so should start modeling to develop the best approach to disclosing the comparison to the peer group total shareholder return. Under the rule, companies must choose whether to use the peer group in the disclosed TSR table or the one used to benchmark executive compensation.
The overarching concern should be implementing a Clawback Policy in a way that does not trigger shareholder lawsuits; this might be the issue that will require the most work. Companies should undertake a deliberative, well-documented process to understand how any restatement of results would affect executive pay. Finally, review the process which pay decisions are documented, so it’s clear which payouts are based on.
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