United States: The Effects of the Dodd-Frank Financial Reform Law on Executive Compensation: What You Need to Know

Early planning for the 2011 proxy season will be needed to address the increased scrutiny of executive compensation that will result under the Dodd-Frank financial reform law.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act), which was passed by the U.S. Senate on July 15, 2010, and is expected to be signed by President Obama this week, does much more than take steps to avoid another financial crisis. Most public companies, not just financial institutions, will be subject to important new executive compensation requirements that will necessitate careful consideration and planning before the 2011 proxy season. While the full scope of these requirements remains to be shaped by U.S. Securities and Exchange Commission (SEC) rulemaking, it is clear that there will be increased scrutiny of executive compensation. This article addresses the executive compensation provisions of the Act. Further analysis of these provisions will be provided in future McDermott publications in the coming weeks.


The Act requires a non-binding shareholder vote at least once every three years to approve the compensation provided to named executive officers and disclosed in the proxy statement. In addition, a separate vote is required every six years that allows shareholders to impose a say-on-pay vote more frequently (i.e., annually or bi-annually). Failure to obtain stockholder approval does not invalidate any prior compensation actions, require a return of compensation or imply a breach of fiduciary duty. However, supporters of the Act believe that the vote will be a powerful tool for shareholders to send a message to boards and their compensation committees, particularly for public companies that use majority voting for directors. Obtaining a favorable say-on-pay vote is not always assured. Earlier this year, shareholders voted not to approve executive compensation practices at three public companies that had voluntarily adopted say-on-pay. The Act also requires a non-binding advisory vote regarding compensation arrangements that are triggered by a merger or acquisition. This vote must be separately solicited in connection with the vote on the transaction unless these arrangements were subject to an earlier say-on-pay vote.

The say-on-pay/say-on-parachute provisions apply to annual meetings that occur six months or more after the enactment of the Act, which means that they will apply to calendar year companies for the 2011 proxy season. Obtaining shareholder approval will likely involve compensation committee members communicating directly with institutional shareholders in advance of sending the proxy statement. Institutional investors may want to receive assurances of future changes, particularly as the Act requires them to disclose their say-on-pay/say-on-parachute votes. Further complicating matters, brokers and other "street name" holders will not be able to vote to approve executive compensation in the absence of a beneficial owner direction. Having these communications will require close coordination with management, the compensation committee consultant, investor relations and the proxy solicitor, as well as assistance from legal counsel to comply with securities law requirements. Management and directors are well advised to learn from the recent experiences of other companies that have already adopted say-on-pay practices, including alternatives for structuring the vote. Failure to do a good job in 2011 might result in an annual say-on-pay vote going forward.

Compensation Committee Independence

The Act provides for the SEC to establish enhanced independence requirements for members of the compensation committee through stock exchange listing standards. The text of the Act suggests that the new standards will focus on certain factors currently used to evaluate enhanced audit committee independence as required under Sarbanes-Oxley. Given the breadth of the existing NYSE and Nasdaq independence standards, any changes are likely to be minimal. As under current listing standards, an exemption from the independence requirement is provided for controlled companies.

The Act codifies the compensation committee's full authority and responsibility over its consultants and legal counsel. Similar to the current requirements for audit committees, the Act provides for the compensation committee to have exclusive control over the appointment, compensation and oversight of any advisor that it hires, as well as reasonable access to funding for advisors. In exercising this authority, the Act requires the compensation committee to consider independence factors to be developed by the SEC, which will include the provision of other services to the company and relationships between the advisor and board members.

While stopping short of requiring that any consultants or advisors that are engaged must be independent, the Act will put more pressure on compensation committees to hire consultants and other advisors that do not have relationships that suggest the potential for a conflict of interest in rendering advice. More compensation committees will likely engage counsel that have fewer relationships with the company and its management, and do so in advance in order to facilitate quick access to independent advice. If there is a reasonable possibility of a conflict of interest, there will be a requirement to disclose the conflict in any proxy statement that is filed a year or more after enactment. An issue to monitor is how the SEC applies this rule to existing engagements—if the committee did not previously consider all of the independence factors prior to selecting an existing advisor, must it do so now?

Expanded Clawback Policies

Virtually all existing clawback policies will need to be modified in light of expanded compensation recovery rules that are mandated through listing standards required under the Act. Specifically, Congress has decided to significantly expand the circumstances in which an accounting restatement required because of material noncompliance with financial reporting standards triggers a clawback. All current and former executive officers are to be covered by a clawback policy, not just the CEO and CFO, as required under Sarbanes-Oxley. The Act also eliminates any need to prove misconduct before erroneously awarded compensation must be recovered. For this purpose, "erroneously awarded compensation" includes incentive compensation paid during the three years—not one year as under Sarbanes-Oxley—preceding the restatement in excess of what would have been paid to the executive officer after giving effect to the accounting restatement. Perhaps most troubling is that the SEC might adopt rules to foreclose the board's discretion to determine that it is not in the best interests of the company to exercise rights under a clawback policy because of the costs of doing so. Also be on the lookout for RiskMetrics to put its own spin on this new requirement through its governance risk indicators (GRId) ratings, such as extending these rules to other types of misconduct. For more details regarding clawback policies, please click here.

New Executive Compensation Disclosure Elements

Yet more executive compensation disclosure will be required for annual proxy statements. Companies will be required to provide more information about the relationship between compensation provided to named executive officers and the financial performance of the company as measured by stock price and paid dividends. Given that this change is being imposed in connection with say-on-pay, it is reasonable to expect that companies will consider going beyond what is legally required. Expect companies to use graphs similar to what had been previously required to compare a registrant's stock price to that of peers.

In addition, companies will also need to disclose the ratio of CEO pay to the median pay of all other employees within the organization. Not only may this requirement be quite burdensome—consider the compliance effort if a public company with thousands of employees worldwide must do the equivalent of a summary compensation table for each employee—but it can lead to results that can be quite provocative depending upon compensation practices that significantly vary among industries. Expect companies to implement policies prohibiting hedging arrangements, given that the Act requires disclosure of whether any director or employee can hedge ownership of equity securities.

What's Next?

We anticipate that the SEC will act quickly to adopt rules implementing many of these changes. It will be important for management to monitor these developments and to inform directors how they affect planning for the 2011 proxy season. In some cases, companies may want to actively participate in the SEC comment letter process. To the extent that new SEC rules are effective for the 2011 proxy season, companies will not have much time to comply, particularly given the resources that will likely be devoted to addressing say-on-pay. Regardless, any compensation decisions that are being considered going forward should be evaluated in light of the Act's new requirements.

The McDermott Difference


The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is set to overhaul the complex system regulating the financial industry. To help clients, colleagues and friends focus on the most pressing changes, adjust strategic direction and plan accordingly, McDermott Will & Emery's top industry specialists will present a special webcast dedicated to this profound legislation. For more information, click here.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions