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Coming Attractions

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Coming Attractions

Dodd-Frank Wall Street Reform and Consumer Protection Act

The financial reform bill, titled the “Dodd-Frank Wall Street Reform and Consumer Protection Act,” will soon be in force for all public companies. This Act is also likely to set the tone for the compensation practices of late-stage private companies. Informally known as the Dodd-Frank Bill, the Act requires a company to describe and defend eight broad compensation-related areas. The following are initial highlights for you to gain a general understanding of the Act. More details will appear in a few weeks that will give you a better understanding of the complete impact of each provision, especially when the various regulatory agencies issue their regulations and rules including final effective dates. Highlights of the eight compensation-related areas are below:

Enhanced Compensation/Proxy Disclosures

The new requirements supplement existing requirements and now include proxy discussion of the relationship between executive compensation actually paid and the financial performance of the company. This disclosure may include a graphic representation of the amount of executive compensation compared to the financial performance of the company, or the return to investors during the period. The provision also requires the company to report the median annual total compensation of all employees (excluding the CEO) and the ratio of the median annual employee total compensation to that of the CEO.

Chair/CEO Structure Disclosure

Within six months of enactment, companies are to disclose in their annual proxy whether they have a separate CEO and chair of the Board of Directors, or if those roles are filled by the same individual. Companies must then explain their reasons for adopting the leadership structure they have chosen. SEC proxy disclosure rules, effective February 28, 2010, require a company to disclose whether the principal executive officer and Board chair positions are separated or combined. If these roles are combined, and a lead independent director is also designated, the disclosure must indicate the role the lead independent director plays in the leadership of the Board. Finally, the proxy must discuss the reasons why the current Board leadership structure is most appropriate for the company.

Say on Pay

Public companies are required to provide shareholders with a non-binding advisory vote on the executive compensation as disclosed in their proxy, a so-called “say on pay” provision. The say on pay provision is effective six months after enactment of the law. However, the law makes clear that the say on pay vote does not create a fiduciary duty on the company or its Board.

Clawbacks

The SEC is to direct all companies to adopt clawback provisions that would recoup incentive-based compensation, including stock options awarded as compensation, when a company is required to restate its financial statements. The clawback period is the three-year period preceding the restatement. The clawback policy would apply to both current and former executive officers. The amount to be recouped, even if there is no misconduct by the executive, would be any incentive-based compensation in excess of the amount that would have been payable after taking into consideration the restatement.

Golden Parachutes

Shareholders must also be given the right to a non-binding vote on these executive compensation agreements (e.g., severance packages) or understandings. In other words, shareholders get to vote on golden parachutes. Like “say on pay,” this provision is non-binding on the Board of Directors and is effective six months after enactment.

Employee Hedging Disclosure

All public companies are to disclose in their proxies if employees or directors are eligible to purchase financial instruments that are designed to hedge or offset any decrease in the market value of equity that is part of their compensation package.

Compensation Committee Independence

All public companies must have compensation committees that consist only of independent directors. Compensation committees must be authorized to hire independent consultants. The legislation spells out that the committee is directly responsible for the appointment, compensation, and oversight of the work of the compensation consultant.

Compensation Consultant and Other Advisor Independence

The compensation committee must now consider the independence of any compensation consultant or advisor before engagement. The bill specifically states that, in developing independence factors to be considered, the compensation committee must make sure that the factors are competitively neutral among categories of consultants, legal counsel and other advisors. The factors must preserve the ability of compensation committees to retain services of consultants/advisors in any category. The bill lists some factors such as (a) policies and procedures that are designed to prevent conflicts of interest, (b) business relationship of the compensation consultant with members of the compensation committee and (c) stock of the company owned by the compensation consultant.

The bill affirms the right of the compensation committee to use its sole discretion to retain compensation consultants. Any such compensation consultant retained must be disclosed in the company’s proxy along with a statement acknowledging any conflict of interest, the nature of the conflict, and how it is being addressed.

Syzygy consultants are a valuable guide to ensure for regulatory compliance and best practices for compensating executives.

Founded in 1995, Syzygy’s principals have more than 50 years of collective experience and ask you to consider Syzygy when seeking truly independent executive compensation expertise. For example, Syzygy provides:

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