SAY ON PAY: DODD-FRANK ACT

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) had a recent first anniversary (it became law on July 21, 2010).  The legislation responded to the financial meltdown that occurred toward the end of the last decade and contains the greatest federal legislative financial reforms since the Great Depression of the 1930s.

Dodd-Frank covers a lot of ground.  Noteworthy for executives of public companies are its provisions concerning shareholders’ approval of executive compensation.

At least once every three years, Dodd-Frank gives shareholders the right to an advisory vote on the compensation of “named executive officers,” who are the principal executive officer, the principal financial officer and the three most highly compensated executive officers other than the principal executive officer and principal financial officer.  This vote on executive compensation is commonly called “Say on Pay.”

At least once every six years, Dodd-Frank also authorizes shareholders to have an advisory vote to determine the frequency of shareholders’ vote on executive compensation of a public company, i.e. whether the Say-on-Pay vote should take place every one, two or three years.

Finally, Dodd-Frank provides shareholders an advisory vote on all severance compensation paid to named executive officers (the top five executives mentioned above) upon an acquisition, merger, consolidation or a proposed sale or disposition of all or  substantially all the assets of a public company.  In other words, this is Dodd-Frank’s provision for shareholder approval of so-called “Golden Parachute” compensation.  Dodd-Frank specifically requires the vote on this shareholders’ resolution to approve Golden-Parachute compensation to be separate from any shareholder vote to approve an acquisition, merger, consolidation, etc.

As a result of Dodd-Frank, corporate board compensation committees must be much more rigorous in setting and justifying the compensation paid to the top executives of their respective companies.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: