Regulators Are Back: What to Watch in Compensation Plans

After taking more than a decade to finalize pay-for-performance compensation rules, the U.S. Securities and Exchange Commission now expects companies to take about six months to comply with them. 

“There will be a lot of computers blowing up in the next several months,” says Todd Leone, a partner at the compensation consulting firm McLagan, an Aon company. “There’s a lot of eye-rolling that we didn’t have much time to do this.” 

Leone was speaking to a group of more than 250 human resources professionals, directors and industry leaders attending Bank Director’s Bank Compensation and Talent Conference, taking place November 8 through 9 in Dallas. The new SEC disclosure rule is one of a host coming down the pipeline for publicly traded companies. Leone says the agency introduced 26 new proposals so far in 2022, the highest it has been in five years. 

“It’s turned into quite a big to-do,” says Susan O’Donnell, a partner at Meridian Compensation Partners, who also spoke about the pay-for-performance regulation on stage. 

After years of little activity finalizing what languished in the Dodd-Frank Act of 2010, regulators under President Joe Biden have taken renewed interest in adopting rules that will impact a broad swath of mostly public companies. In 2015, the SEC first proposed rules to require companies to disclose more about the relationship between executive pay and performance. In August, the SEC adopted the rules, which go into effect for fiscal years ending on or after December 16, 2022. In other words, most public banks will be required to provide the new disclosures starting in the 2023 proxy season. Smaller reporting companies are subject to scaled disclosure requirements. 

“I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies,” SEC Chair Gary Gensler said in a statement at the time. O’Donnell says companies will have to report executive compensation alongside financial performance metrics, including total shareholder return, as well as TSR of a peer group, net income and a financial performance metric chosen by the company. In all, the company will be required to report three to seven financial performance metrics. 

This could cause problems for banks that complete M&A deals, Leone says. Typically, net income falls after an acquisition because of one-time expenses. At the same time, compensation increases, sometimes to motivate the executive team to make the deal a success. He recommends banks include a description in the disclosure that describes why pay and performance may not appear to align.

“Institutional investors aren’t looking at this to tell them anything they don’t already know,” Leone says. “The one area where we’re scratching our heads is what are the plaintiffs’ lawyers going to do. You have to make sure there’s a story behind this and a narrative that you’re telling.” The first year, Leone says companies will have to disclose three fiscal years of compensation metrics, so he advises companies to get started now on 2020 and 2021 calculations. Each year, another year will be added, until companies report five years’ worth of data. 

Companies will have more time to comply with the other recently finalized disclosure rule required by the Dodd-Frank Act, this one having to do with clawing back incentive compensation that was granted in error. Leone referred to the rule as “lovely bedtime reading for those of you with insomnia,” because it encompasses more than 200 pages

In October, the SEC finalized the rule that had first been proposed in 2015 requiring companies to disclose their policies regarding clawing back compensation from named executives. Usually, those clawbacks occur due to restatements of earnings or misconduct. Although the rule doesn’t say that clawbacks must occur for misconduct, the rule does require companies to claw back compensation that was based on erroneous calculations, regardless of whether the executive was at fault for the error. Leone expects the rule to go into effect later in 2023. Smaller reporting companies do have to comply with this one. 

And the third disclosure rule coming down the pike for public companies is Nasdaq’s new board diversity rule. Laura Hay, lead consultant for Meridian Compensation Partners, says the exchange will require companies to have at least one diverse director starting in 2023 and two starting in 2025, or explain why they don’t have them. Diversity may include gender or underrepresented minorities, as well as LGBTQ individuals.

The exchange also requires that companies include a diversity matrix in their disclosures, which went into effect in August for the next proxy season.

Do Audit Committees Really Need a Lawyer for Every Meeting?

scales.jpgThe chairman of the board of a Securities and Exchange Commission (SEC) issuer recently told me that his company pays an annual $150,000 retainer to outside legal counsel to attend its audit committee meetings. He explained that this outside legal counsel attends every meeting as a matter of course, not because the committee is dealing with any specific legal issue. The chairman wondered if this expense was really necessary or required. Good question.

In 1999, the influential Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees issued a report and recommendations. The committee—11 members drawn from the business, financial and accounting communities—was established in September 1998 by the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) to make recommendations on strengthening the role of audit committees in overseeing the corporate financial reporting process.

One recommendation advised that when circumstances dictate, “management should help the audit committee retain independent legal counsel.” It also included several sample audit committee charters. These included references to retaining independent counsel to help with investigations into matters within the audit committee’s scope of responsibilities.

Following release of the report, the stock exchanges and the SEC adopted several reforms focused on the role and independence of audit committees. Among other things, registered companies were required to adopt audit committee charters, and many nonregistered companies did the same just as smart governance policy. Today’s charters often call for independent legal counsel for the audit committee. 

With the emphasis on audit committee independence, it’s no surprise that an audit committee may, at times, need to turn to outside legal counsel rather than relying on corporate counsel. But this need usually arises in extreme situations, such as when dealing with management fraud, shareholder accusations of impropriety or regulatory complaints related to the board. Is it necessary to keep independent counsel on retainer and involve them in routine meetings? I find it hard to see the value of having independent counsel on retainer to attend regularly scheduled meetings. Absent specific ongoing issues, it would be difficult to justify the high costs of doing so. I’d like your feedback on this.

  • Has your audit committee ever engaged independent counsel?
  • Do you keep counsel on retainer?
  • What is the counsel’s level of participation in audit committee governance?

I look forward to reading your responses in the comments below.

The Impact of the JOBS Act on Banks

construction.jpgOn March 27th, the House of Representatives passed the Jumpstart Our Business Startups Act (the JOBS Act). The Senate approved the same legislation the prior week and and the bill was signed by President Obama yesterday.

In part, the JOBS Act changes the Securities and Exchange Commission (SEC) registration requirements under the Securities Exchange Act of 1934 (the Exchange Act) in two respects for banks and bank holding companies.  

First, the JOBS Act increases the threshold for Exchange Act registration with the SEC from 500 shareholders of record to 2,000 shareholders of record. This amends the current rule which requires registration for companies with more than $10 million in assets and 500 shareholders of record. Up to this time, many small banks with assets over $10 million have avoided SEC registration by keeping the number of shareholders below 500. The new threshold will now allow smaller banks to raise capital by selling stock to new shareholders without having to register with the SEC.

Second, the JOBS Act increases the threshold for deregistering securities with the SEC for banks and bank holding companies from 300 shareholders of record to 1,200 shareholders of record. Consequently, more publicly-held banks may explore deregistration in order to avoid the costs and aggravation of continued SEC registration. 

Exchange Act regulations subject a company to the SEC’s public disclosure and reporting requirements, including periodic financial reporting (Forms 10-Q and 10-K), detailed governance and compensation disclosures (proxy statements) and share ownership reporting (Forms 3, 4 and 5). (It is not clear that Congress intended for the legislation to exclude thrifts and thrift holding companies and it is possible that the SEC may include thrifts and thrift holding companies when it issues regulations on the new registration thresholds.)

In deciding whether to explore deregistration, companies should consider some of its advantages and disadvantages:


Deregistration can provide a publicly held company with certain advantages, including:

Expense Reduction—Companies that deregister will save expenses in several areas, including costs associated with SEC filings, shareholder communications, professional fees, and, potentially, lower premiums for directors and officers liability insurance.

Increased Dividends—Companies that eliminate expenses associated with SEC registration may be able pass the savings to shareholders in the form of increased dividends.

Eliminate Personal Financial Disclosures—Deregistered companies would no longer be required to report transactions in the company’s stock and would also not be required to disclose detailed compensation information in the annual proxy statement of the company.

Reduce Pressure from Dissident Shareholders—Deregistered companies may be able to reduce certain pressures from dissident shareholders because those companies would no longer be required to comply with certain periodic reporting and disclosure obligations.  However, dissident shareholders would also not be required to publicly disclose their stock holdings.

Focus on Long-Term Goals—By eliminating certain reporting and disclosure obligations (quarterly reports, for example), deregistered companies may find it easier to focus on long-term business strategies rather than satisfying short-term shareholder expectations.


When weighing the advantages of deregistering, companies should also keep in mind certain disadvantages, including:

Reduced Access to Public Equity Markets—Publicly traded companies generally have greater access to equity markets and, therefore, can often raise capital more quickly than private companies.

Reduced Market for Stock—Deregistered companies are ineligible to list their stock on the NASDAQ OMX or other stock exchange. Consequently, shareholders of deregistered companies, including officers and directors, may not be able to sell stock as quickly as they could with an actively traded security. However, many registered companies have small markets for their stock which already limits the ability of individuals to timely buy and sell. Further, some institutional shareholders may have policies that prevent them from holding securities of deregistered companies.

Reduced Ability to Use Stock in Acquisitions—Deregistered companies may find it more difficult to use stock in structuring acquisitions because issuing stock as acquisition consideration may not qualify for a private placement exemption and, thus, require SEC registration. However, deregistering should not affect the ability of the company to be acquired.

Loss of Public Company Status—Many companies believe that being a public company enhances the business reputation of the company.