The Dodd-Frank Wall Street Reform and Consumer Protection Act has had far-reaching effects on businesses in the U.S. since it went into effect in 2010. Aimed at regulating financial bodies to prevent another crisis as experienced in the years prior, certain measures have been put in place to keep tighter tabs on the practices of financial institutions and companies. Public companies face some different rules from private ones, and shareholder roles have shifted somewhat since the implementation of Dodd-Frank.
Jeffrey London, a Kaye Scholer Partner, shed some light on the changes that have been occurring as the reforms take hold. Largely, shareholder engagement is one of the biggest trends stemming from the law. London notes that the “say on pay” vote — where shareholders approve the remuneration of executives — has had an impact on the engagement of shareholders overall. The say-on-pay votes are publicized and are seen as drivers of reputation for companies. Even though the votes are nonbinding, public embarrassment is mostly at stake should compensation be voted down, or should approval ratings not favor executives.
“Companies are very concerned not only on their ‘say on pay’ vote passing, but in passing with a large approval percentage. A pass by a 60-40 percent is unacceptable and companies seek at least a 90% shareholder approval,” London said.
Naturally, this desire to have high approval ratings has influenced the engagement of executives with shareholders — at least the bigger ones. London says that companies are making a “greater effort to engage in discussions with at least their more significant shareholders to understand their views on pay and to consider such views in developing and implementing their executive pay philosophy.”
Thusly, compensation itself is changing for executives. “Because of the views of these large shareholders, we are continuing to see movement towards a greater percentage of compensation being paid based on performance targets and objectives, versus merely a ‘pay for breathing’ approach,” London says. “That, too, is a positive trend since the key executives are paid only to the extent they are bringing in value to the shareholders.”
The ways in which pay practices are fleshing out are also being examined more closely by certain bodies. Proxy advisory firms and some institutional shareholders are scrutinizing executive pay practices now more aggressively, says London. Controlling the pay performance model is more top-of-mind than it had been. London argues that, while say on pay practices have certainly driven executive compensation structures in certain directions, the trend of heightened engagement was already coming into play.
“The ‘say on pay’ requirements may have accelerated the increased movement of pay for performance, but market forces likely would have led us in that direction regardless of Dodd Frank.”
All in all, greater shareholder engagement is certainly a positive trend, and as the Securities and Exchange Commission continues to flesh out the regulations of Dodd-Frank, more shifts in executive compensation could be at hand.