By Irv Becker, Senior Client Partner and North American Leader, Executive Pay & Governance, Korn Ferry Hay Group
The inauguration will soon be a memory—and it’s still pretty much a mystery what impact the Trump administration will have on the world of executive compensation. This means one thing for compensation committees: be ready for a host of possible regulatory shifts.
But predicting the next few months doesn’t have to be all guesswork. Certainly, based on the issues the new president campaigned on, there are several signals suggesting certain changes. And having a Republican-controlled Congress, of course, only helps on the forecasting. Here’s what we think:
1. Be aware that Dodd-Frank could be scaled back but likely won’t be rescinded.
During the presidential campaign, President-elect Trump railed against burdens imposed by the mammoth Dodd-Frank Act, which placed extensive rules and regulations on the financial industry. It’s unlikely that the new administration will seek to repeal the entire law, but rather will focus on dialing back specific provisions related to executive pay. It’s worth noting that some requirements—such as say-on-pay votes by a company’s shareholders—have become best practices that now are needed to satisfy investors and proxy advisory firms and would continue even in the unlikely event that the law were completely repealed. Any new rules to be adopted by the Securities and Exchange Commission (SEC) will await the president-elect’s proposals and the appointment of a new SEC chair.
2. Be prepared to comply with the CEO pay ratio disclosure rule.
While especially contentious provisions of Dodd-Frank, such as the required CEO pay ratio disclosures, eventually could be impacted, Dodd-Frank was enacted in 2010 and companies should plan to comply with the rules already adopted by the SEC. CEO pay ratio disclosures are not scheduled to be made until fiscal years starting in 2018, and our own study indicates that a majority of companies have a good deal of work to do. Companies can prepare by (a) focusing on the key variable, CEO compensation for the past several years; (b) carefully considering the process for determining the median employee, including such factors as the number and location of non-US employees and whether there is a significant number of seasonal employees that could affect the date used for determining employees; and (c) conducting a dry run with 2016 compensation data and a draft disclosure. Further, boards should proactively address possible consequences of CEO pay ratio disclosure to a range of stakeholder groups.
3. Be ready to address say-on-pay votes, proactively, if the market dips.
At least during the initial “honeymoon” period, Trump has seemingly had a salubrious effect on the stock market, but we don’t know what lies ahead. While mandatory shareholder say-on-pay votes have been in effect for five years, compensation committees should be prepared for possible slower economic growth and declining share price and TSR. That may translate into greater pushback from investors on proposed executive pay plans. Compensation committees should re-examine their executive pay programs to ensure that they can withstand scrutiny, and should engage with key stakeholders to convey the logic of pay programs as well as the balance of fair, motivational pay strategies in periods of economic downswings.
4. Make sure the compensation committee is evolving to meet new responsibilities.
Under the Trump administration, compensation committees will require the agility to respond appropriately to a shifting regulatory environment as well as to manage increasingly complex compensation packages. In many cases, we also see these committees taking on newly expanded talent management duties. With such crucial, strategy-linked responsibilities, boards should make sure their compensation committees are in fighting shape.