Investors Could Lose Influence Over Executive Pay

  • Votes credited with improving outreach to largest investors
  • Still-pending Dodd-Frank restrictions may soon be halted

Threat of Dodd-Frank Repeal Puts Say-on-Pay Rules at Risk

Donald Trump, who was elected U.S president last week largely on support from working-class voters, could scrap rules designed to make pay in corporate America more egalitarian if the Republican follows through on a promise to dismantle the Dodd-Frank Act.

Crafted in the aftermath of the 2008 financial crisis, the law contains provisions that strengthen investors’ ability to restrain outsized pay packages for company chiefs. The bill requires clawback provisions, advisory votes on executive compensation and mandated disclosure of a CEO-to-worker pay ratio.

Trump soared to victory on promises of returning economic power to “forgotten Americans,” criticizing chief executive officer pay along the way. “You see these guys making these enormous amounts of money,” Trump told CBS in a 2015 interview. “It’s a total and complete joke.” 

Two days after the Nov. 8 vote, Trump published plans to scrap Dodd-Frank and “replace it with new policies to encourage economic growth and job creation.” Overturning it could reduce leverage over corporate boards enjoyed by institutional investors, who serve as stewards for American savers.

The law’s say-on-pay rule, requiring public companies to let shareholders weigh in on executive compensation at least every three years, was introduced in 2011 to eliminate pay that was either too large or could encourage excessive risk-taking. While pay packages for U.S. executives haven’t declined since then, the rule prompted many boards to ramp up engagement with large investors.

Chilling Effect

Removing the legal requirement for the non-binding vote “would have a slight chilling effect on engagement,” between companies and investors, said Christopher Wightman, a partner at CamberView Partners who advises corporate boards. Even without say-on-pay, there’d be ways for large investors to express discontent, such as withholding votes for directors on a board’s compensation committee, he said.

Shareholders might also put pressure on companies to keep the votes even if Dodd-Frank is repealed. Proxy advisory firms could propose that clients vote against directors at companies without say-on-pay, according to Jon Lukomnik, executive director of the Investor Responsibility Research Center Institute in New York.

“A company that withdraws it is going to make itself a target,” Lukomnik said. “That doesn’t mean some won’t withdraw it.” He said he expects many companies would keep an annual say-on-pay vote.

Trump’s Moratorium

If the law is rescinded, some Dodd-Frank rules might be short-lived. That includes the CEO-to-worker pay ratio set to take effect in 2017, and guidelines for disclosure of the relationship between company performance and executive compensation that haven’t yet been implemented. Trump has vowed to issue a temporary moratorium on new regulations that aren’t “compelled by Congress or public safety.”

The pay ratio, which has been lamented by companies as costly to calculate and lacking relevant use for investors, “could be seen as an example of excess regulation that stifles growth and is a drag on the economy,” said Margaret Engel, a partner at executive-pay consultant Compensation Advisory Partners.

Political risks may prevent Trump from throwing out Dodd-Frank in its entirety, said Alan Johnson, managing director of compensation consultant Johnson Associates.

“The rational Donald Trump would not try to totally overturn Dodd-Frank,” Johnson said. “He’d make some adjustments but not do a total cave-in to Wall Street. The Democrats would beat the cr*p out of him if he did that -- a low upside, high downside strategy. But he may do it anyway, who knows.”

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