Issues related to performance measures in light of Dodd-Frank.

• Author: Reda, James F.
• Position: Disclosure and Risk

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank includes several provisions that impact executive compensation, including new required disclosures on pay-for-performance and CEO pay relative to typical worker median pay. These new rules are in addition to the rules relating to disclosure of performance measures and target levels, and the impact of risk on executive compensation plans and programs. The SEC is scheduled to issue proposed regulations on proxy disclosure in time for the 2011 proxy season.

Because incentive compensation comprises the bulk of executive pay packages at publicly-traded companies, boards of directors and senior management are continually searching for the right performance measures to balance rewards with both financial and operational performance as well as non-financial and individual performance. Once companies get beyond the difficulties of designing executive programs that adequately balance pay versus performance, they now have the added pressure of clearly explaining their pay-for-performance formula to investors.

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Outside advisors, lawyers and consultants have a substantial role in the process of setting and describing performance measures and goals. There are four major issues for publicly-traded companies relating to performance measures, which are as follows:

* Use of short- and long-term performance measures that have been approved by shareholders (contained in incentive and equity plans);

* Mandatory clawback of incentive payouts if financial statements have been restated, causing the performance goals to not be met;

* Adequate disclosure of performance goals (measures and levels) in the proxy filing; and

* Review of the risk associated with performance plans and appropriate proxy disclosure.

Determining the compensation for senior executives is a difficult process. The unique environment of the company and the individual needs of executives must be considered as compensation programs are designed. These considerations alone can be overwhelming; however, the piercing public scrutiny of executive pay decisions and practices further complicates the overall process of setting executive pay.

Independent Decision Making

While Congress has focused on issues such as disclosure, they have also focused on the independence of the decision making process by requiring that legal and compensation advice be independent...