The following analysis was prepared by Ryan Hemphill in the Spring of 2011. Here, Ryan Hemphill addresses the Executive Compensation provisions within the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. By analyzing the specific language of the Act’s executive compensation provisions, as well as the legislative intent and public policy goals behind them, Ryan Hemphill makes recommendations for the SEC’s forthcoming rules to be promulgated based on this controversial financial reform bill.
Executive Compensation Provisions within Dodd-Frank
The advent of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“The Act”, “Dodd-Frank”) is not the first time Congress, or other areas of the federal government for that matter, have attempted to address matters of executive compensation. As recently as 2002, Congress passed Public Law N. 106-204: the Sarbanes-Oxley Act (Sox or Sarbox) which, although primarily aimed at addressing matters of Corporate Governance and Responsibility, did introduce several provisions as it relates to loans, other credit transactions and use of certain “fringe” benefits (such as company planes, cars) by corporate executives as compensation. Whereas Sarbox implemented rules with all-out prohibitions on certain types of executive compensation, Dodd-Frank is more focused on matters of clarity in disclosure of executive compensation to shareholders. Given the severe and systemic nature of the recent financial crisis (as compared to the relatively more contained Enron/Tyco/WorldCom scandals that inspired Sarbox as a legislative response) one would expect Dodd-Frank to be more binding/aggressive as it relates to implementing actual limitations on compensation, as opposed to simply requiring greater disclosure. However, considering that the expressed legislative intent of the Dodd-Frank Act is to implement “Wall Street Reform” and the executive compensation provisions in Dodd-Frank subject all corporations (both financial and non-financial companies) to new regulations in executive compensation, this section actually goes beyond the expressed intent of the bill.