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Financial reform bill includes “say on pay,” other employment-related provisions; Towers Watson finds employers ill-prepared

The House this week passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173), voting 237-192 in favor of a broad package of financial industry reforms and moving a sweeping overhaul of the regulation of US financial services and markets one step closer to enactment. The Senate, where Republican support for the bill continues to be sought, is not expected to take up the bill until mid-July. Historic reforms include key employment provisions, according to Jim Hamilton, JD, LLM, principal federal securities law analyst for Wolters Kluwer Law & Business. (Hamilton tracks ongoing financial reform developments at CCH’s Financial Reform News Center and his leading Jim Hamilton’s World of Securities Regulation blog). Among the employment-related provisions in the works:

  • Corporate governance: The legislation gives shareholders a say on pay and proxy access, ensures the independence of compensation committees, and requires companies to set clawback policies to take back executive compensation based on inaccurate financial statements, seen as important steps in helping shift management’s focus from short-term profits to long-term growth and stability.
  • Hedging rules: The SEC is directed to adopt rules requiring a company to disclose whether any employee or director is permitted to purchase financial instruments designed to hedge the market value of equity securities granted to the employee or director as part of his or her compensation.
  • Executive compensation disclosure: The SEC is required to amend Item 402 of Regulation S-K to mandate disclosure of the median of the annual total compensation of all employees, except the CEO; the annual total compensation of the CEO; and the ratio of the two.

Yet with enactment of sweeping reform looming, a survey by professional services company Towers Watson has found that relatively few US companies are well prepared to put their executive pay programs up to a say-on-pay shareholder vote. However, many are taking steps to get ready if the pending legislation giving shareholders a greater voice in executive pay becomes law. The Towers Watson survey found that only 12 percent of respondents said they are very well prepared for the say-on-pay legislation, while 46 percent said they were somewhat prepared. Just under one-fourth of respondents (22 percent) didn’t know if their companies were ready.

“Given the amount of work companies will need to do to adapt to life in a say-on-pay environment, it’s noteworthy that relatively few companies feel they are well prepared,” said Andrew Goldstein, in Towers Watson’s executive compensation business. ”Companies understand that they’ll need to do more than simply describe their pay programs in their proxies and are beginning to take meaningful steps so that they are prepared.”

What actions are they taking in preparation for say-on-pay legislation? Nearly seven out of 10 respondents (69 percent) said they were identifying potential executive pay issues and concerns in advance, while six in 10 (60 percent) said they were improving their Compensation Discussion & Analysis to better explain the executive pay program’s rationale and appropriateness for the company. In addition, many companies indicated they are engaging with proxy advisors (44 percent) to discuss areas of concern, meeting with key institutional shareholders (29 percent) and preparing a formal communication plan (23 percent).

The Towers Watson Executive Say-on-Pay Flash Survey was conducted online in June 2010 and is based on responses from 251 US publicly traded and privately held corporations representing a cross-section of industries