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Financial Reform Legislation is Coming, and Public Companies Should Start Planning Now for Say-on-Pay

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

April 29, 2010

The Restoring American Financial Stability Act of 2010 (1,410 page PDF) (the “Dodd Bill”), which would reform regulation of financial institutions and the securities markets, has been introduced, and debate on the Senate floor has finally begun. It appears that the bill will probably be approved in the next few weeks in some form, followed by conference committee action to resolve differences with the Frank Bill that was approved by the House in December. The two bills include overlapping but differing governance and compensation reform provisions that apply to all public companies (or, in some cases, to all companies listed on a securities exchange). The ON Securities Cheat Sheet (PDF) has been updated, making it easier to compare these provisions in the two bills.

Both the Senate and House bills would require Say-on-Pay – an annual shareholder advisory "up or down" vote on compensation. Therefore, it is very likely that Say-on-Pay will be a reality by next year’s proxy season. Public companies should start planning for Say-on-Pay now, including considering what compensation practices might trigger a negative vote.

The Council of Institutional Investors (CII) just published “Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Pay” (PDF), which provides rules of thumb to help institutional investors identify pay programs that might be objectionable. Whether you agree or disagree, the CII document makes interesting reading. Most of the red flags are pretty obvious, including option repricing. Others are more thought-provoking. For example, CII considers it a “problematic pay practice” to grant conventional (time-vested) stock options to the CEO. The CII document recommends:

To isolate management’s contribution to stock price performance, stock options should be indexed to a peer group or should have an exercise price higher than the market price of common stock on the grant date and/or vest on achievement of specific performance targets that are based on challenging quantitative goals.

"I’m Just a Bill"

Thinking about the committee process in Congress brought to mind the great "Schoolhouse Rock" series of animated shorts from the 1970s, and the episode called “I’m Just a Bill.” The song was written by the equally great Dave Frishberg (a songwriter who also wrote “My Attorney Bernie”), and it actually does a pretty good job of explaining the process by which Senate and House bills become laws.


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