SEC Acts on Compensation Committee Regulation

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Today the SEC announced final rules concerning compensation committees of public company boards of directors.  This action is a mere two years after being mandated by the Dodd Frank Act and demonstrates the struggles of the SEC in keeping up with its regulatory agenda.  That having been said, the content of the final rules is not startling.

Basically, securities exchanges now must establish listing rules that traded companies must comply with, requiring a wholly independent comp committee with the power to hire and totally control compensation consultants; companies must agree in advance to foot the bill.

Proxy disclosure amendments require indication of conflicts of interest between the consultant and the company and management, and how the conflict is being addressed; proxy disclosure already elicits details about the use of consultants, payment of fees, etc.

Many but not all public companies use consultants; while it is clear that using consultants is not sufficient alone to discharge fiduciary duty, the data provided by consultants and the discussion of variables is strong evidence of diligence and care.  Some large companies do not use consultants as a matter of practice, but the burden of going against a de facto best practice is heavy.

Those who decry creeping regulation through the securities laws as a drag on entrepreneurship and job creation, and who react negatively to the web of regulation contained in Dodd Frank, will have more evidence to point to.  But the new rules are not a significant added burden to the already existing practices of most companies.  The real game is the loss of the older practice of the board fixing compensation in its own judgment and not having to explain it to anyone.  And today, even with a comp committee and consultants, poor performance in stock price will foster resistance to the board from shareholders and problems with ISS.

The real problem of course is driven by human nature.  In fixing compensation of C level executives, what board member is content to say that his or her executive is just average in skills, or even below average (someone HAS TO BE below, mathematically)?  Does the disclosure say “Your board decided we have and want to keep an average CEO and pay him the market average, we think the board discharges its duty to you in this regard by providing mediocre pay to a mediocre president”?  Not hardly likely.  Boards want to think, and do think, they have gotten someone above average, at least.  Everyone ends up being perceived as above average.  The pay scale increases to make a new, higher average.

These are not human dynamics that can be cured by disclosures and by preventing conflicts of interest.  Unless the unthinkable is thought of (regulation by government or quasi-governmental institutions of actual executive pay), it will continue.  Again, a failure of regulation to rein in human nature.

It remains good to be king.  And to be a C level executive.


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