Companies Need to Prepare for Pay and Governance Rules

According to a Mercer report, provisions of the Wall Street Reform And Consumer Protection Act subject companies to: 

• Mandatory say-on-pay votes on executive compensation and golden parachutes; 
• Enhanced disclosure of pay and performance alignment, internal pay equity, hedging policies, and leadership structure; 
• Clawbacks of compensation in the case of a material financial restatement; and  
• Independence standards for compensation committees and their advisers.  

See Financial Reform Measure Includes Compliance Provisions. 

Mercer suggests companies complete a holistic review of executive compensation programs for potentially problematic pay practices that may trigger negative votes on say-on-pay resolutions and consider approving changes before year end. Firms should become familiar with the voting policies of key shareholders and their proxy voting advisers, such as Institutional Shareholder Services and Glass Lewis.    

The Mercer Perspective report also suggests firms ferret out any dissatisfaction with pay policies and practices. Shareholder communication approaches can include meetings, online surveys, and email forums. According to Mercer, the SEC recently confirmed that having a dialogue with shareholders is not prohibited by securities laws’ prohibitions on selective disclosure as long as proper protocol is followed.  

Firms should also weigh whether to adopt an annual say-on-pay vote or whether a less frequent vote is more appropriate.  

Mercer recommends companies start early on 2011 proxy disclosure.  Focus on the “why’” rather than the “how” of compensation decisions. Improve readability with executive summaries, charts, and other graphics. Expand disclosure to explain any potential “hot button” issue, the report said.