LL: One of the biggest changes Dodd-Frank legislation will bring is more disclosure on CEO compensation. Do you think this will add more accountability on the boards to make the appropriate compensation decisions?
RF: I already think that Boards have full accountability for CEO compensation decisions. However, if shareholders feel as though the Board is not doing a good job in setting CEO pay, they now have a more direct vehicle for voicing their dissatisfaction, which is Say on Pay.
LL: Will performance finally be a criteria for pay?
RF: For the past several years most companies have stated in their proxies that it is their objective to align executive pay and performance. Most stopped there. There was little discussion around how, or if, this actually happened. With the passage of Dodd-Frank this past July, companies will now be mandated to describe how they are aligning performance and pay and provide a clear description in their Proxies of how pay is aligned with performance.
LL: How will this impact the upcoming proxy season?
RF: This may impact the upcoming proxy season marginally. The pay and performance disclosure requirement will not take effect until late 2011 or 2012. I think we will see companies that have successfully aligned pay and performance use their 2011 proxies to disclose the fact that they are ahead of the game and providing the information in advance of the requirement.
I also see this proxy season as a great opportunity for boards and shareholders to open communication channels. The basic intent of Dodd-Frank is to encourage better communication between companies and investors. After all, the role of the SEC is to ensure that investors receive the information they need in order to make the most informed investment decisions, not to opine on the quality of the executive pay programs.
Investors want to understand how all of the pieces of compensation, as well as pay actions, work together to create the right result. They don’t want compensation that is hidden or comes from a dozen places.
What they want is for board members to do their jobs by planning and making decisions that are in their best interests.
Then, they want these companies to clearly and proactively communicate their plans and decisions. These expectations pertain to executive compensation, as well as any other executive matters. The key message here is that investors want regular, transparent communications of decisions that they deem to be defensible.
LL: AFLAC broke the "Say On Pay" barrier back in their May 2008 shareholder vote. Are you expecting more companies to do the same?
RF: AFLAC was the first company to introduce Say on Pay in 2008. Now, with the passage of Dodd-Frank, and the beginning of the 2011 proxy season—all public companies will be required to have a non-binding vote on the executive compensation system.
For the most part, investors have voted overwhelmingly in favor of the executive compensation arrangements. However, there have been a few cases in which shareholders have lodged a negative non?binding vote. These negative vote cases demonstrate that shareholders focus on three key factors
when deciding how to vote, including:
- Performance of the company (i.e., total shareholder return, both relative and absolute)
- Alignment of executive pay relative to performance and to market pay reasonableness
- Transparency of pay programs and decisions
It is these issues boards should pay the most attention to, not only as they design pay programs. but as they communicate with their shareholders. Indeed, it is unrealistic to think that most shareholders will have the resources to take a deep dive into the pay programs of the companies in which they have
invested. Instead, they will more likely have to rely on the company or on shareholder advisory groups to make a convincing case one way or the other.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."