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Executive Compensation

Michael Melbinger
T: +1 (312) 558-7588 | Email

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September 25, 2009

Get a Head Start on Compensation Plan Risk Assessment for 2010 Proxy Season

The most important year-end 2009 task for Companies, Boards of Directors, and Compensation Committees may be to begin to establish a process for assessing the risk of the Company's executive and employee compensation programs. The SEC is expected to publish final rules later this Fall, which will apply to companies' 2010 proxy statements, and require that every company:

Evaluate whether any of its compensation plans or practices, including non-executive officer compensation plans and practices, include risk-taking incentives that may have a material effect on the company, and
Disclose the results of that evaluation and any steps the company has taken to manage or mitigate those risk-taking incentives.

Last week the SEC created a new division for the first time since 1972, the Division of Risk, Strategy, and Financial Innovation.

The failure to conduct a risk assessment process in the thorough and intensive manner required by the rules, which most companies have not historically conducted, could put a company at a disadvantage when the SEC rules are finalized. A failure to conduct a risk assessment in compliance with the rules could lead to increased scrutiny (and liability) from the SEC and shareholders, and/or the company's failure to identify or manage a critical incentive for risk-taking.

This requirement originally appeared in the Emergency Economic Stabilization Act of 2008 (EESA), as amended by the American Recovery and Reinvestment Act of 2009 (ARRA). The EESA and ARRA provisions only apply to companies receiving funds under the Troubled Asset Relief Program. However, legislation passed by the full House of Representatives would, if approved by the Senate and signed by the President, impose similar requirements on all public companies, even if the SEC does not finalize the rules this year.

Therefore, we think that all public companies should prepare to conduct a risk assessment this year. More details to come next week.

Michael S. Melbinger