Reference no: EM132223791
Human resources leaders and compensation experts will always need to attract talented managers to their corporations. However, newer laws are in place to help rein in large executive salaries.
Sarbanes-Oxley (SOX) in 2002 has allowed the Securities and Exchange Commission (SEC) to “claw back” executive pay and stock awards retroactively. SOX has mandatory reporting requirements of all company perks, jets, country club memberships, and so on.1
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into federal law by President Barack Obama on July 21, 2010. Commonly known as the Dodd-Frank, it requires that a public company present to its shareholders a plan to approve compensation, and “enhanced compensation” must be disclosed to the SEC. The goal is to monitor executive compensation by making sure executives are meeting performance-based goals.
The Dodd-Frank Section 953 requires additional disclosure about certain compensation matters, including pay-for-performance and the ratio between the CEO’s total compensation and the median total compensation for all other company employees.2
SOX and Dodd-Frank are very large laws that HR people might not be able to follow on a daily basis. However, since the recession of 2008, there has been much more attention paid to the large salaries executives receive.
Most large salaries come in the form of stock and stock options in the company. CEOs are rewarded for their performance by receiving these stock options. For example, CEO Larry Ellison of Oracle was paid $96 million in 2012 and $77 million in 2013 (he declined a performance bonus and took $1 in salary).
However, a study by professors found that, the more CEOs got paid, the worse their companies did.3 One conclusion was that the CEOs became overconfident in their abilities and made poor decisions. Another conclusion might be that they lost their focus and motivation and found other pursuits outside the company to follow. For example, Ellison is very active and a big supporter of yacht racing.
The clawback issue is still being pursued in 2015 as part of Dodd-Frank. The SEC voted to propose a rule that would require exchanges to establish standards for revoking executive bonuses when companies restate earnings or make accounting errors leading to the restatement of earnings, regardless of the executive’s fault.4 The clawback window would extend for 3 years after the bonus was given.
There is also a call for improving the Sarbanes-Oxley legislation since it has been more than 10 years since the regulation has been established. BoardProspects is an online professional community dedicated to building better boards of directors for private, public, and nonprofit organizations. Mark Rogers, the founder and chief executive, posts that the real problem with executive compensation starts with the board of directors. He points at the collapse of Enron as a failure of the board of directors. The board didn’t safeguard Enron shareholders and contributed to the collapse of the seventh largest public company in the United States. The board allowed Enron to engage in high-risk accounting, inappropriate conflict of interest transactions, extensive undisclosed off-the-books activities, and excessive executive compensation. Rogers claims that executive pay would be more reasonable if there were term limits on how long a person can serve on a board, limits on the number of boards a person can sit on at one time, and requirements for continuing education on governance as part of his or her training.5
1. What is a clawback process in regard to executive compensation?
2. How do the newer laws impact the job of the HR person or compensation expert?
Why is the Dodd-Frank legislation so important to executive compensation?
Why is Sarbanes-Oxley an important part of HR?
What is the role of the board of directors in setting executive pay?