Executive Compensation and the Role of the Compensation Committee

SEC Regulations

Item 402 of Regulation S-K

A full disclosure of all executive compensation must be made in the Summary Compensation Table of the annual filings (8-K, 10-Q, or 10-K). The Summary Compensation Table and any related tables and narrative sections must be included in the company's Compensation Discussion and Analysis (CD&A) with an accompanying disclosure on how compensation decisions and policies have taken into account the results of the most recent say-on-pay vote. This does not apply to smaller reporting companies.

Dodd-Frank Act

This act was introduced to promote financial stability by improving accountability and transparency in the financial system, and to protect consumers from abusive financial services practices. The executive compensation-specific Dodd Frank Act provisions include:

1. Say-on-pay vote: Shareholders approve the compensation for the company's named executive officers. The vote does not cover non-employee director compensation disclosed in the proxy and must be held at least once every three years.

2. Say-on-frequency vote: Shareholders determine the frequency of the say-on-pay vote to be every one, two or three years. The say-on-frequency vote must be held at least once every six years.

   • In a say-on-frequency vote there must be four choices: whether the say-on-pay vote will occur every (1) one, (2) two, or (3) three years, or (4) to abstain from voting.
   • The vote must be reported on an amended Form 8-K and be filed no later than 150 calendar days after the meeting, but in no event later than 60 days prior to the deadline for submission of shareholder proposals.
   
   

3. "Golden parachute" vote: A company must disclose any "golden parachute" arrangements that are triggered by a transaction in merger proxy statements and similar filings (not in annual proxies). Golden parachutes have two purposes:

   1. As a defensive measure to prevent hostile takeovers. As such, they are often called "poison pills."
   2. As a recruiting and retention tool for executives. In this regard, golden parachutes are change-of-control insurance.

   The narrative disclosure of the golden parachute must describe any material conditions or obligations applicable to golden parachute payments (i.e., restrictive covenant agreements), specific circumstances that trigger payment, the form and source of those payments, and any other material factors concerning each agreement. The disclosure rules apply to disclosure of all golden parachute arrangements for the named executive officers of the target and the acquiring company.

4. Clawback Policy: As a result of Sarbanes-Oxley, most financial services firms and public firms are required to have clawbacks for the CEO and CFO in the event of an intentional fraud triggering a restatement of their financials. With SEC approval of the Dodd-Frank rule on clawbacks on October 26, 2022, clawbacks are extended to include all current or former executive officers in policymaking roles (not only the CEO and CFO) and may also be triggered by an unintentional misstatement, not just intentional misconduct. Clawbacks apply to compensation paid in the three years leading up to a restatement.

   A clawback policy includes the following terms:

   • Covered Employees - protects the company and its shareholders as well as provides a deterrent or penalty for problematic behavior.
   • Covered Compensation - any performance-based compensation, limited to both short- and long-term incentives, that includes any equity-based compensation gains.
   • Covered Restatement - this protects overpayment due to an adjustment to previously stated company financials in which the employee plays either an active or passive role. Controls are often put in place by internal and external auditors that are relied on for guidance and approval.
   • Board Discretion - triggered by any qualifying restatement where discretion can be applied allowing relevant facts and circumstances to be considered and relative to a cost/benefit assessment before recouping prior payments.
   • Effective Date - clawback policies can be retroactive or prospective, include prior awards and grants and have a limit to the look back.