As described in a recent Osler Update, on July 21, 2010, sweeping financial
reform was signed into U.S. law by President Obama. The new law
affects more than just Wall Street financial institutions and
contains new requirements on corporate governance, federal
securities law and executive compensation provisions.
In the Dodd-Frank Wall Street Reform and Consumer Protection
Act, there are lots of new goodies on the executive
compensation front. While most of the new compensation rules would
not seem to apply to Canadian issuers (unless they are voluntarily
complying with U.S. compensation disclosure rules instead of
Canadian rules), they may indeed set a new standard for best
practices because U.S. institutional investors will become
accustomed to these requirements:
Say on Pay will now be the law of the land in the U.S.
Interestingly, the Act requires companies to allow shareholders a
non-binding vote not only on the Company's pay policies, but
also to vote on how often they will vote on pay (annually,
biennially, or triennially). Shareholders will also get to vote on
golden parachute packages, in the context of a transaction.
New proxy rules require a "pay equity" comparison,
showing the ratio between the median total compensation for all
employees worldwide, and the CEO's total compensation. This
comparison is expected to be a burdensome one to prepare.
Compensation committee members must meet new independence
standards, and further, they must consider the independence of
their compensation advisers before engaging them, using factors
that will be established by the SEC.
Compensation claw-backs, which require executives to disgorge
ill-gotten gains or bonuses, have become increasingly popular. The
Act now requires issuers to develop a policy to recoup incentive
payments made to current or former executive officers prior to any
accounting restatement due to the issuer's material
non-compliance with financial reporting requirements and to
disclose their policy to shareholders.
The company must disclose whether employees or directors are
allowed to purchase financial instruments that would hedge the
downside risk in their stock compensation programs. I suspect that
many companies that currently do not have a policy on this will
soon be developing one, rather than disclose that the Company does
not monitor executive and director hedging.
Financial institutions will be subject to enhanced disclosure
and reporting of executive compensation, with specific attention to
incentive compensation that could lead to risk-taking and material
loss to the institution. U.S. operations of foreign banks will be
Sandra Cohen leads the U.S. compensation and
benefits team, advising Canadian and U.S. corporations on executive
compensation and employee benefits matters.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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