Posts Tagged ‘Executive Compensation’

Executive Compensation Under Dodd-Frank: an Update

Editor’s Note: Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. This post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

The Dodd-Frank law took effect July 21, 2010. [1] Subtitle E of Title IX of Dodd-Frank addresses “Accountability and Executive Compensation” (§§951-957). Since the enactment of the act, the Securities and Exchange Commission (SEC) has adopted final rules as to two of the provisions, proposed rules as to two others and has not yet proposed (but has announced it will be proposing) rules as to another three provisions. This post summarizes the current status of regulation projects under Dodd-Frank Sections 951 through 957.

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Excess Risk Taking and Competition for Managerial Talent

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 31, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from Viral Acharya, Professor of Finance at NYU; Marco Pagano, Professor of Economic Policy at the University of Naples Federico II; and Paolo Volpin, Professor of Finance, Cass Business School.

Excessive risk-taking by financial institutions and overly generous executive pay are widely regarded as key factors in the 2007-09 crisis. In particular, it has become commonplace to blame banks and securities companies for compensation packages that reward managers (and more generally, other risk-takers such as traders and salesmen) generously for making investments with high returns in the short run but large risks that emerge only in the long run. As governments have been forced to rescue failing financial institutions, politicians and the media have stressed the need to cut executive pay packages and rein in incentives based on options and bonuses, making them more dependent on long-term performance and in extreme cases eliminating them outright. It is natural to ask whether this is the right policy response to the problem. It is crucial to ask what is the root of the problem—that is, precisely which market failure produced excessive risk-taking.

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Compensation Committee Guide 2014

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 24, 2014 at 9:25 am
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Editor’s Note: The following post comes to us from Michael J. Segal, partner in the Executive Compensation and Benefits Department of Wachtell, Lipton, Rosen & Katz, and is based on the introduction to a Wachtell Lipton memorandum by Mr. Segal, David C. Karp, Jeannemarie O’Brien, Adam J. Shapiro, Jeremy L. Goldstein, and David E. Kahan; the complete memorandum is available here.

The past year in executive compensation has been marked by two continuing trends: (1) a continuing refinement of conceptions of so-called “best practices” advocated by certain shareholders and responses to those refinements by compensation committees, most notably in the context of the nonbinding, advisory “say-on-pay” vote required by the Dodd-Frank Act (“Dodd-Frank”) and (2) an increased desire by corporations to engage with shareholders to convince them of the appropriateness of their responses and the corporation’s compensation arrangements generally. Against this backdrop, the key challenge for compensation committee members has been to continue to approve compensation programs that directors believe are right for their corporations while maintaining a sufficient understanding of these emerging shareholder views and communicating the appropriateness of their arrangements to avoid attacks that could undermine directors’ abilities to act in their company’s best interest.

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Are Female Top Managers Really Paid Less?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 24, 2014 at 9:24 am
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Editor’s Note: The following post comes to us from Philipp Geiler of the Department of Finance at EMLYON Business School and Luc Renneboog, Professor of Corporate Finance at Tilburg University.

In our recent ECGI working paper, Are Female Top Managers Really Paid Less?, we focus on the gender wage gap of executive directors in the UK. In particular, we ask the question whether female top managers are paid less than their male counterparts, whether the gender wage gap is higher in male dominated industries (such as financial services etc.), and what effects female non-executive directors and remuneration consultants exert on pay.

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Risk Choice under High-Water Marks

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday March 20, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from Itamar Drechsler of the Department of Finance at New York University Stern School of Business.

High-water mark (HWM) contracts are the predominant compensation structure for managers in the hedge fund industry. In the paper, Risk Choice under High-Water Marks, forthcoming in the Review of Financial Studies, I seek to understand the optimal dynamic risk-taking strategy of a hedge fund manager who is compensated under such a contract. This is both an interesting portfolio-choice question, and one with potentially important ramifications for the willingness of hedge funds to bear risk in their role as arbitrageurs and liquidity providers, especially in times of crises. High-water mark mechanisms are also implicit in other types of compensation structures, so insights from this question extend beyond hedge funds. An example is a corporate manager who is paid performance bonuses based on record earnings or stock price and whose choice of projects influences the firm’s level of risk.

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Governance Priorities for 2014

Editor’s Note: Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on an article that originally appeared in Practical Law The Journal. The views expressed in the post are those of Ms. Gregory and do not reflect the views of Sidley Austin LLP or its clients.

As the fallout from the financial crisis recedes and both institutional investors and corporate boards gain experience with expanded corporate governance regulation, the coming year holds some promise of decreased tensions in board-shareholder relations. With governance settling in to a “new normal,” influential shareholders and boards should refocus their attention on the fundamental aspects of their roles as they relate to the creation of long-term value.

Institutional investors and their beneficiaries, and society at large, have a decided interest in the long-term health of the corporation and in the effectiveness of its governing body. Corporate governance is likely to work best in supporting the creation of value when the decision rights and responsibilities of shareholders and boards set out in state corporate law are effectuated.

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Motivating Innovation in Newly Public Firms

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday February 12, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Nina Baranchuk and Robert Kieschnick, both of the Finance and Managerial Economics Area at the University of Texas at Dallas, and Rabih Moussawi of the Wharton School at the University of Pennsylvania.

How do shareholders motivate managers to pursue innovations that result in patents when substantial potential costs exist to managers who do so? This question has taken on special importance as promoting these kinds of innovations has become a critical element of not only the competition between companies, but also the competition between nations. In our paper, Motivating Innovation in Newly Public Firms, forthcoming in the Journal of Financial Economics, we address this question by providing empirical tests of predictions arising from recent theoretical studies of this issue.

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CEO Employment Agreements in a “Say on Pay” World

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday February 8, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Michael S. Katzke, a founding partner of Katzke & Morgenbesser LLP, and is based on a Katzke & Morgenbesser publication by Mr. Katzke and Henry I. Morgenbesser.

Although much has been written and discussed in the past few years about the impact of “Say on Pay” and Dodd-Frank on CEO compensation practices (including the narrowing or elimination of employment agreement provisions such as excise tax and other tax gross-ups and automatic “evergreen” renewal terms which have not been viewed as shareholder friendly), there has been less discussion as to whether employment agreements remain a viable option in a Say on Pay world. In spite of the complicated relationship between a CEO hire and the company, some companies, as a policy matter, do not put the terms of such relationship in writing. Complexities that are often spelled out in a written agreement include duties and responsibilities of the CEO, compensation (including formulaic increases during the term), the duration of the term of employment, termination provisions, severance payments under certain termination scenarios, and post-employment restrictive covenants. As discussed below, in our view, written employment agreements continue to be viable and recommended, particularly in the case of CEOs hired from outside the company.

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Jamie Dimon’s Pay Raise Sends Mixed Signals on Culture and Accountability

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on Monday February 3, 2014 at 4:46 pm
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in the Harvard Business Review online, which is available here.

The JP Morgan Chase board of directors has vexed the world with its terse announcement in a recent 8-K filing that CEO Jamie Dimon would receive a big pay raise—$20 million in total pay for 2013, up from $11.5 million for 2012, a 74 percent increase.

Not surprisingly, the news sparked strong reactions, from indignant critique to justification and support. Dimon’s raise obviously has special resonance because JP Morgan’s legal woes were one of the top business stories last year as it agreed to $20 billion in payments to settle a variety of cases involving the bank’s conduct since 2005 when Dimon became JPM CEO. But the ultimate question that gets fuzzed-over in the filing and response is one of culture and accountability—whether a long-serving CEO is accountable for a corporate culture that has spawned major regulatory inquiries and settlements across a broad range of legal issues, even though the firm has otherwise performed well commercially.

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Selected Issues for Boards of Directors in 2014

Posted by Alan L. Beller, Cleary Gottlieb Steen & Hamilton LLP, on Saturday February 1, 2014 at 9:00 am
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Editor’s Note: Alan L. Beller is a partner focusing on complex securities, corporate governance and corporate matters at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum.

Over the past year, boards of directors continued to face increasing scrutiny from shareholders and regulators, and the consequences of failures became more serious in terms of regulatory enforcement, shareholder litigation and market reaction. We expect these trends to continue in 2014, and proactive board oversight and involvement will remain crucial in this challenging environment.

During 2013, activist investors publicly pressured all types of companies—large and small, high-flyers and laggards—to pursue strategies focused on short-term returns, even if inconsistent with directors’ preferred, sustainable long-term strategies. In addition, activists increasingly focused on governance issues, resulting in heightened shareholder scrutiny and attempts at participation in areas that historically have been management and board prerogatives. We expect increased activism in the coming year. We also expect boards to continue to have to grapple with oversight of complex issues related to executive compensation, shareholder litigation over significant transactions, risk management, tax strategies, proposed changes to audit rules, messaging to shareholders and the market, and board decision-making processes. And, as evidenced in recent headlines, in 2014 the issue of cybersecurity will demand the attention of many boards.

…continue reading: Selected Issues for Boards of Directors in 2014

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