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Dodd-Frank Act: For One-Year Anniversaries, Paper Is the Appropriate Gift

This article is more than 10 years old.

Image by Getty Images North America via @daylife

The Dodd-Frank Wall Street Reform and Consumer Protection Act passed on July 21, 2010, a little more than a year ago.  To mark this anniversary, I thought it would be helpful to ask whether we are where we thought we’d be.  The answer of course is “yes” and “no.”

“Yes” in the sense that shareholders have expressed their opinions on the appropriateness of the pay packages of some 2,500 public companies.  And “yes” in the sense that by and large, companies and shareholders have taken this vote seriously.  This has hastened the decline of “poor pay practices” (as delineated by ISS), caused investors to be more clear about which practices they consider to be acceptable and which ones they do not, and has improved the communication between companies and their investors.

But “no” in the sense that the SEC has delayed a number of its Dodd-Frank implementation deadlines, including new listing standards regarding independence for compensation committees and compensation advisors, detail on clawback rules for recovery of executive compensation, and new disclosures on pay for performance and pay ratios (i.e., the ratio of CEO compensation to the median compensation for all employees).  As turns out, writing detailed rules for some of these provisions isn’t so easy.  Modified timing for implementation is shown below.

Also, the answer is “no” for those who thought we’d see vitriolic protests among investors via rampant “no” votes.  Instead, only about 2 percent of companies have received majority “no” votes, suggesting that investors generally do not want to second guess compensation committees. Further, investors are reserving their “no” votes for only the most egregious cases of compensation misbehavior.  The answer also is “no” to those who thought once every three years for a shareholder vote would be enough.  Instead, investors want to keep companies on a short leash, coming back for a new vote every year.

Finally, the answer also is “no” for those who thought we would see a ratcheting down of executive compensation.  Instead, we’ve seen nearly a 30 percent growth rate in median executive compensation among the S&P 500 from 2009 to 2010, driven primarily by significant growth in earnings and stock prices – outcomes that also benefit investors.

The chart below sums it all up:

There seems to be something for everyone here.  For those who expected say on pay to result in Armageddon, with precipitously falling pay levels and a one-size-fits-all approach to compensation, things aren’t as they expected.  For those who expected a “non-event,” things also are not as expected.  Companies are voluntarily cleaning up their pay practices, and shareholders, by and large, wanting to re-look at the pay system annually.  For those of us who expected implementation delays, we got what we expected as the democratic and open process of defining complicated statutes is anything but easy.

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Robin A. Ferracone is the Executive Chair of Farient Advisors LLC, an independent executive compensation and performance advisory firm that helps clients make performance-enhancing, defensible decisions that are in the best interests of their shareholders.  Robin Ferracone is the author of a recently published book entitled Fair Pay, Fair Play: Aligning Executive Performance and Pay, which explores how companies can achieve better performance and pay alignment. Robin can be contacted at robin.ferracone@farient.com.