Executive Compensation

The final rule requires a company to address its compensation policies and practices for all employees, including non-executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company.* The "reasonably likely" disclosure threshold would parallel the MD&A requirement, which requires risk-oriented disclosure of known trends and uncertainties that are material to the business. 

However, what public company in the US would state in its proxy that "our compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company"? The answer is: none. 

If a company were to conclude that one of its compensation plans was "reasonably likely to have a material adverse risk" it would fix the plan or take other mitigating steps immediately, rather than state that in its proxy.

Moreover, the final rule does not require a company to make an affirmative statement that it has determined that the risks arising from its compensation policies and practices are not reasonably likely to have a material adverse effect on the company.) 

However, we believe that companies should go through the process of evaluating their compensation plans and arrangements this year. If a company suffers an unexpected loss in the future that can be traced back to executive compensation - and let's face it, the press, the government and the plaintiffs lawyers will trace everything back to executive compensation - the first questions to a board member on the witness stand might be: "Did you evaluate this risk. Did you take steps to mitigate it?" The board member should be able to respond: "Yes, we evaluated that risk and, in our judgment, the steps we took and procedures in place were reasonable and appropriate to mitigate it." The business judgment rule will protect those who studied the plans and risks and concluded they were acceptable.

Additionally, as we learned from the learned from the 2006 changes to the executive compensation disclosure rules, when the SEC highlights an area for disclosure, a company's failure to discuss that area or issue may draw a comment letter from the SEC. 

So what should a company say when it doesn't have to make an affirmative statement, but it has to say something? We will make some guesses in future Blogs.

* The proposed rules would have required discussion and analysis of compensation policies if risks arising from those compensation policies "may have a material effect on the company."