By: Cydney Posner

Corporate Counsel is reporting on the introduction by Barney Frank of a new bill to address a current hot political topic, "The Protection Against Executive Compensation Abuse Act." Although the bill would certainly face stiff opposition from a variety of fronts, it may, to some extent, be a harbinger of things to come in the area of executive compensation (including anticipated SEC proposals). (Remember that various predecessors to SOX languished in Congress for a long time until a series of scandals triggered SOX's hasty passage.)

First, the bill would require proxy disclosure of a comprehensive statement of all compensation paid or to be paid to a company's principal executive officers, called "an executive compensation plan," that would include

  • an estimate of the present value of any accrued pension;
  • the estimated market value of any other benefits (such as golden parachute agreements, personal use of private jets/company apartments and other compensation) and any agreements or understandings concerning any type of compensation;
  • the short- and long-term performance measures that the issuer uses for determining compensation and whether such measures were met by such officers during the preceding year; and
  • the policy of the issuer regarding clawbacks of compensation (which policy would be required, as discussed below).
The bill states that the proxy solicitation materials must require a separate shareholder vote to approve the executive compensation plan. While the meaning of the bill on this point is not entirely clear, Corporate Counsel contends that approval would not be required of the substantive compensation arrangements, but only the disclosure, following the model that applies in the UK, where shareholders can vote on the disclosure made in compensation committee reports. Although the votes are non-binding, they are intended to deliver a message to the board.

Second, the bill would require, in any proxy material related to an acquisition, merger, sale of assets, etc., shareholder approval of any agreements or understandings with any principal executive officers concerning any type of golden parachute.

Third, the bill would require the SEC to issue rules mandating companies to adopt policies requiring the reimbursement to the company by any principle executive officer of any compensation received by the officer that is

  • not provided for in the compensation plan described above;
  • based on performance by the officer that does not meet the job performance measures identified in the plan;
  • incentive compensation or bonuses received by the officer within 18 months before any negative material restatement by the company; or
  • related to fraud or misrepresentation on the part of the officer.
Finally, the bill would require that companies include on their websites clear and simple disclosures on the company’s SEC filings related to compensation.

Under the bill, the definition of principal executive officer would vary depending on the size of the company, with only the CEO covered for those companies with less than $250 million in total assets, the CEO and the next two highest paid executives for companies with more than $250 million but less than $500 million in assets, and the CEO and next four highest paid executives for companies with more than $500 million in total assets.

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