On June 10, 2009, Treasury Secretary Timothy F. Geithner announced broad-based principles aimed at bringing executive compensation practices of public companies more in line with shareholder interests. In connection with the proposals, the Obama administration will support efforts in Congress to pass legislation giving the Securities and Exchange Commission authority to require companies to give shareholders a nonbinding "say on pay" and also re-evaluate independence standards for compensation committees. SEC Chairman Mary Schapiro also issued a statement on SEC proposals regarding executive compensation. 

Secretary Geithner outlined the following guiding principles:

  • Compensation plans should properly measure and reward performance. Compensation should be tied to performance in order to link incentives with long-term value creation. Performance metrics should take into consideration a company's performance relative to the performance of its peers. Performance-based pay should be linked to a wide variety of internal and external metrics, not just the company's stock price.
  • Compensation should be structured to account for the time horizon of risks.   Compensation should be tightly aligned with the long-term value and soundness of the company and should be conditioned on the company's long-term performance. Secretary Geithner specifically mentioned requiring executives to hold stock for a longer period of time as an effective means of tying compensation to long-term performance, but noted that directors should have flexibility to determine how best to align incentives in the particular industry and circumstances.
  • Compensation practices should be aligned with sound risk management. Compensation committees should conduct and disclose risk assessments of pay packages to ensure they do not encourage imprudent risk-taking. Companies should also explore alternatives to provide risk managers with the tools and authority to improve the effectiveness of managing the complex relationship between incentives and risk-taking.
  • Alignment of executive and shareholder interests with respect to golden parachutes and supplemental retirement packages should be reexamined. Golden parachutes and supplemental retirement packages should be reexamined to determine whether they truly incentivize performance or whether they reward executives even if shareholders lose value.
  • Transparency and accountability should be promoted in the process of establishing executive compensation. Secretary Geithner noted that in too many cases, compensation committees have not been sufficiently independent of management and companies have not been fully transparent in explaining their compensation packages to shareholders. 

Secretary Geithner also described the following legislative proposals supported by the Obama administration:

  • Say on Pay. The SEC would be given authority to require companies to give shareholders a nonbinding "say on pay" vote on executive compensation packages.
  • Independent Compensation Committees. The SEC would have power to revise the independence standards for compensation committees to make them more similar to those in place for audit committees. Additionally, compensation committees would be given responsibility and resources to hire independent compensation consultants and outside counsel. 

Chairman Schapiro's statement set forth several proposals the SEC is considering regarding proxy disclosure. These proposals would require disclosure regarding (i) how a company and its board manage risks; (ii) overall compensation approach; (iii) potential conflicts of interest issues with compensation consultants, including disclosure of relationships between the consultants and the company and their respective affiliates; and (iv) director nominees, including nominees' experience and qualifications to serve on the board or particular board committees, and why a board has chosen its leadership structure.

If you have questions or concerns about executive compensation reform efforts, please feel free to contact one of these Ballard Spahr attorneys:

Mary J. Mullany (215.864.8631; mullany@ballardspahr.com)
Securities Group, Employee Benefits and Executive Compensation Group

Justin P. Klein (215.864.8606; kleinj@ballardspahr.com)
Securities Group

Brian M. Pinheiro (215.864.8511; pinheiro@ballardspahr.com)
Employee Benefits and Executive Compensation Group

Copyright © 2009 by Ballard Spahr LLP.
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