Disclosure of CEO pay regulatory-issues. It is always a wise time to consider the regulatory problems requiring decisions and action. Court cases alleging excessive pay have focused on whether plans that govern director may 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.
Should different limits exist for roles or a single cap for all directors?
Companies should consider reviewing and documenting their pay-setting process thoroughly, including how the board sets director pay and the role of peer group selection. Consider the optimal time to adopt a limit, whether it should be in the omnibus plan approved by shareholders, and whether the board can amend 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 ask finance departments and their accounting firms to consider GAAP rule changes as part of the compensation planning process.
Disclosure of CEO pay regulatory-issues
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 necessary; 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 require companies to disclose their adopted policy to shareholders. Given the heightened shareholder focus, the rules do not need any specific hedging policy; companies should consider adding or amending an approach.
Companies that still need to do this should start modeling to develop the best approach to disclosing the comparison to the peer group’s 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 in which pay decisions are documented to clarify which payouts are based.
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