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The Future Under Dodd-Frank

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August 17, 2010 | Barbara Baksa

The Future Under Dodd-Frank

As those of you that have been keeping up with my blog entries know, for the past few weeks, I've been covering the executive compensation-related provisions of the Dodd-Frank Act, highlighting tidbits I learned at a presentation by Mike Andresino of Posternak Blankstein & Lund and David Wise and Sara Wells of Hay Group at the July Silicon Valley NASPP chapter meeting. This week I discuss some of the changes David thinks we can expect to see for stock compensation as a result of the Act. (If you're keeping score, that's three blog entries from one chapter meeting--now that's what I call a productive meeting!)

Stock Compensation Under Dodd-Frank
Here are a few changes we might see to stock compensation under the Dodd-Frank Act.

More Double-Triggers

In the NASPP's 2010 Stock Plan Design Survey (co-sponsored by Deloitte), I was surprised by the number of companies with plans that provide for immediate acceleration of vesting on a change-in-control. With shareholders now given the opportunity to vote on executive pay packages and a separate vote for change-in-control provisions that haven't previously been voted on, expect to see more companies move to a double-trigger (i.e., vesting accelerates only if the executive is terminated within a specified period after the CIC).

Greater Use of Performance Awards

With companies now required to disclose how executive pay relates to performance, it seems fairly clear that this will propel the use of performance-based awards.  At the same time, the requirement to disclose the ratio of CEO pay to median employee pay may cause boards to look for ways to reduce the value of CEO pay. Since this disclosure is based on amounts in the SCT--rather than actual payouts--one way to accomplish this is to grant options and awards that are subject to performance conditions. 

For LTI programs in general, David expects to see more interest in relative goals (because absolute goals have become so challenging to set), more use of multiple goals (e.g., an absolute goal with a relative goal), more companies using three measures instead of just two measures, lowering of plan maximums, and longer vesting schedules. 

Premium-Priced Options

Options granted with a price above the grant date FMV have never really caught on, but do result in a lower grant-date valuation. Since this is the value reported in the SCT, premium priced options could help improve the CEO to median employee pay ratio, perhaps increasing their popularity.

Broad-Based Plans?

Another way to make the CEO to median employee pay ratio look better is to increase employee pay.  Could this cause companies to consider expanding eligibility for stock compensation programs? Maybe--if you are looking at raising pay, seems like it would be easier to do this with a non-cash expense than with cash compensation.


More companies may also start requiring deferred payout for awards.  David points out that deferrals serve two goals: (i) they can be of assistance in enforcing clawback provisions--now required under Dodd-Frank and (ii) they help facilitate enforcement of stock ownership/holding requirements--a primary means of risk mitigation in stock plans. 

The 18th Annual NASPP Conference is Just Five Weeks Out!
Scheduled for Sept 20-23, the 18th Annual NASPP Conference is timed perfectly to help our members prepare for mandatory Say-on-Pay and the other requirements of the Dodd-Frank Act. We've added a special Say-on-Pay track, featuring key advice and real-world strategies from in-the-know practitioners. Register for the Conference today.

NASPP New Member Referral Program
Refer new members to the NASPP and your NASPP Conference registration could be free.  You can save $150 off your registration for each new member you refer, up to the full cost of registration. You'll also be entered into a raffle for an Apple iPad and the new members you refer save 50% on their membership--it's a win-win! Don't delay--this program ends on August 31.    

NASPP "To Do" List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing "to do" list for you here in my blog. 

- Barbara

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