Executive Compensation, a Divided Commission, and the Consequences of Dissent (Part 1)

We had planned today to start a series of posts on board diversity, keyed to the recent government sponsored study in Britain about women on the board.  But we thought a delay was warranted by the events at the Commission yesterday.

The Commission proposed a rule on executive compensation.  The initiative is mandated by Section 956 of the Dodd-Frank. The Section contains a short time frame.  Rules must be adopted (not proposed) within 9 months after adoption of the Act.  The provision also command the adoption of substantive requirements.  The rules must "prohibit any types of incentive-based payment arrangement, or any feature of any such arrangement, that the regulators determine encourages inappropriate risks" including those that may result in the payment of "excessive compensation, fees, or benefits".  We blogged on this provision and noted that it was a sleeper requirement that could have the most significant impact on executive compensation. 

It was, as a result, a particularly complex effort.  The SEC was not allowed to just go it alone but had to write the regulatons jointly with a host of other agencies.  Moreover, the banking agencies were likely in the drivers seat.  The requirements were mostly meant to apply to large banks and financial institutions.  The SEC was only drawn into the effort because it also applied to large investment advisors and brokers (those with $1 billion or more in assets). 

The rules propose not just disclosure but, as Dodd-Frank commanded, substantive restrictions.  As the press release notes, the proposal:

• Provide additional requirements for financial institutions with $50 billion or more in assets, including deferral of incentive-based compensation of executive officers and approval of compensation for people whose job functions give them the ability to expose the firm to a substantial amount of risk.

Among other things, this will require certain bonuses to be paid in stock that will be subject to a vesting schedule.  The attempt is to give top officials in the entity an incentive to manage for the long term.  This is the approach undergoing implementation in Europe.

Yet this proposal (and it is only a proposal) engendered another 3-2 vote at the Commission.  It is the pattern that has emerged in the corporate governance area.  Access was 3-2; say on pay was 3-2.  Now these proposals are being adopted by the same narrow margin.  

We'll talk about the consequences of this in the next post.