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Apr 02, 2012

Final Dodd-Frank pay rules delayed

Rules on CEO pay ratio, pay for performance and clawbacks affected

Everyone loves getting an extension on a looming deadline. In late January, public companies got just such a reprieve when the SEC announced that rule-making on key Dodd-Frank Act provisions about disclosure and executive compensation would be delayed until the second half of 2012.

‘Companies are off the hook for another year,’ says Paul Hodgson, an executive compensation expert and senior research associate at GovernanceMetrics International. ‘That’s something I’m sure they’ll welcome with delight, because they feel bombarded with new regulations at the moment.’

Laurence Stybel, vice president of Board Options in Boston, agrees. ‘There’s really no reason to bring up the delay at the next board meeting,’ he says. ‘Always put off until tomorrow what you have to do today. Why? Because tomorrow, you might not have to do it.’

Once the jubilation subsides, however, companies will have to consider what the delay might mean. Is the SEC uncomfortable with vociferous corporate objections to the idea of calculating and publicizing CEO pay ratios? Or is it nothing more than a sign that SEC lawyers are overworked and understaffed, and simply couldn’t write rules for such complicated issues as quickly as they’d hoped?

Ready, set, stop

The SEC missed its previously announced deadline of December 31, 2011, for finalizing rules on four key provisions under Dodd-Frank: mandatory clawback policies and disclosure; pay versus performance disclosure; CEO pay ratio disclosure (the ratio of chief executive pay to the company’s median salary); and disclosure of hedging by employees and directors.

Steve Seelig, executive compensation counsel for Towers Watson’s research and information center in Washington, points out that a number of groups have met with the SEC to express their displeasure with CEO pay ratio disclosure. ‘There’s certainly been active ongoing discussion with the SEC on this issue,’ he says.

Hodgson concurs. ‘This is definitely the pay provision that’s exercising companies the most,’ he notes. ‘They’re fighting tooth and nail not to do it.’ He explains that for nearly two decades there’s been proposed legislation that would cap a chief executive’s pay at some ratio of workers’ pay. Instead of establishing a fixed cap, Dodd-Frank says the ratio of top pay to median pay must simply be disclosed.

Ira Kay, managing director at Pay Governance, a firm that provides independent executive compensation advice to boards, points out that companies are particularly relieved at the delay on pay ratio disclosures because ‘this is a presidential election year’. He argues that the ratio matters mainly from a sociological point of view and is the type of quotable nugget that many might brandish in the Occupy Wall Street era.

It’s not clear whether the SEC’s consideration of this single issue has delayed the promulgation of the regulations or whether the SEC is simply overwhelmed with other projects, explains Seelig. ‘I think the SEC is just swamped, and they’re under-funded,’ says Hodgson.

Snowed under

Supporting that view is the Boston Consulting Group, which was tasked with providing an internal review of the SEC as part of Dodd-Frank and found that the regulator was roughly 400 employees short of the number necessary to manage its current workload. The study found that SEC staffing levels had declined from 2005 to 2011, while the regulator has taken on an increased workload because of Dodd-Frank and problems highlighted by the 2008 financial meltdown.

The SEC might also have seen advantages to waiting to rule on some of the other pay-related issues. Kay points out that the pay versus performance disclosure rules are very difficult to craft, and the longer the SEC waits to nail down a solution, the more ideas it might glean from companies tackling the issue on their own. ‘Does the regulator want to create a homogeneous solution, or does it want to allow companies to do their own thing heterogeneously in responding to what pay for performance should look like?’ he asks.

Ira Kay, managing director at Pay GovernanceDealing with clawbacks and hedging presents companies with other problems. Kay, pictured left, says that hedging isn’t allowed at most large companies (and so is not a pressing issue), and that clawback rules can be written in so many different ways that many companies are choosing to wait for SEC guidance.

When the SEC delays rule-making on a hot governance issue like this, the ripple effects can even be felt outside the US. Sylvia Groves, principal at GG Consulting, a governance consulting firm based in Calgary, Ontario, says, ‘From a Canadian perspective, the longer it takes the US to make the rules, the longer it will be before a follow-through version ends up here.’

Groves also points out that this delay might have ramifications for other items on the SEC’s agenda, such as proxy plumbing reform. ‘If rule-making on compensation disclosure is delayed, other things that need to be addressed probably won’t be dealt with in a timely manner either,’ she predicts.

Preparing for the future

Regardless of the cause of the SEC delays, some public companies might not see the extra time as a blessing.

Hodgson notes that some public companies could face shareholder resolutions on executive pay because the SEC has not yet charted a clear course. ‘In the absence of the SEC saying, This is how you do it, shareholders are taking it into their own hands and saying, We want you to do it this way,’ he explains.

He notes that Goldman Sachs and Morgan Stanley recently bowed to shareholder concerns and amended their clawback policies. ‘For some companies, this might actually create more work because they have to deal with shareholders on independent topics rather than simply doing what the SEC says,’ he adds.

Public companies also have a chance to score a shareholder relations coup by implementing reform ahead of the SEC regulations. ‘A company that implemented some of these policies by itself would enhance its reputation fairly significantly,’ says Hodgson.

Although savvy companies are taking stock of their pay versus performance disclosures, most are biding their time rather than making decisive moves. ‘I think executive compensation disclosure is going to be in the ‘to do’ file for boards. They’ll push it to one side and wait for the SEC to act,’ concludes Hodgson. ‘Companies just need to make sure their corporate secretaries inform them of any future developments.’