As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act and new rules stemming from the legislation, public companies are faced with clearly defining supplemental compensation for executives. As corporate directors gear up for this year’s proxy season, the National Association of Corporate Directors (NACD) has released a proposed framework to address this much talked-about say on pay issue.
NACD developed the pay-for-performance principles and definitions to help guide companies and boards as they prepare for the 2014 proxy season, and as part of their broader shareholder engagement programs. The association recommends boards employ the following when defining supplemental executive compensation:
- Standard definitions, with flexibility;
- Consistent time horizons, oriented to the long term;
- Disclosure beyond the CEO; and
- Importance of board judgment and company context.
Establishing a common language that companies and boards can use to assess and communicate the link between executive compensation and company performance is a critical issue this proxy season, according to Ken Daly, president and CEO of NACD.
“In today’s business climate, companies are increasingly providing additional executive compensation disclosures to shareholders, but without standard definitions in place, the approach to disclosure and the information conveyed have widely varied,” Daly said in a statement.
The Dodd-Frank Act requires companies to disclose the relationship between compensation paid to its senior executives and the financial performance of the company. The final rule on this provision is pending from the Securities and Exchange Commission (SEC).
Last year, regulators proposed a rule that would require public companies to make CEO compensation more transparent. The proposed rule was originally proposed in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and it mandates that public companies to report the wage gap between their CEOs and rank-and-file employees.
Three of the five members of the SEC voted in favor of the proposal. The commission wants companies to provide two more data points in their filings: median of the total compensation for all employees excluding the CEO, and the ratio between that number and the CEO’s annual total compensation.
In the absence of standard definitions, many companies are taking the initiative to include supplemental pay definitions in their proxy statements in an effort to provide more meaningful information to their shareholders, NACD officials said.
In a July 2013 survey of NACD members, 60 percent of directors and nearly two-thirds of compensation chair committee respondents supported the idea of standard baseline definitions for realized and realizable pay, provided companies could maintain flexibility to include additional data.
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