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Slide 2 Book: Bagley & Savage, Managers and the Legal Environment Chapter 21 Executive Compensation Reform Stock options-click here By Leticia Escoto ??? Slide 3 Im The Scroll Ask me a Question? I have the answer. My Name is Happy Clueless Slide 4 COMPENSATIO N EXCESS has lead TO CORPORATE REFORM Why is executive compensati on reform needed? Slide 5 See the next slide to see a graph of executive salaries compared to corporate and employee earnings. Slide 6 Sarbanes-Oxley Act of 2002 Slide 7 The Board of Directors. Who sets the compensation for the corporate officer? Slide 8 They are governed by federal regulation and state laws. Who Governs the boards Actions? Slide 9 Not really Is the Board independent of influence from the executive officers? Slide 10 Good question. National Association of Corporate Directors which is a COMPENSATION COMMITEES oversight groups have called for independent compensation committees since 1990s. Cant there be an independent committee setting salaries? Slide 11 problem The reality is most executive compensations committees are not truly independent and are influenced by the directors they are setting compensation wages for. That sounds great. whats the problem then? Slide 12 Every state has their own corporate conduct Codes. They require corporate officers to show two basic Fiduciary responsibilities. 1.Duty of Care 2.Duty of Loyalty What kind of state laws? Slide 13 They are all similar except for Delaware. Section 102(b)(7) of the Delaware corporate code permits the certification of incorporation to include a provision eliminating the personal liability of the directors Are all State laws the same? Slide 14 State laws governs the actions of Boards For public and privately held companies equally Are Private and public companies governed differently? Slide 15 The first reforms were the securities act of 1933 and 1934. Two principal federal acts that regulate securities transactions and issuers. What Federal Reforms are there to try to regulate this problem? Slide 16 Three fundamental beliefs of the Securities Exchange Act of 1933 & 1934 1.Investors should be provided with full information prior to investing 2.Corporate insiders should not be allowed to use nonpublic information concerning their companies to their own financial advantage 3.Investors who have been injured by misconduct should receive relief even in the absence of common law fraud What were the Securities Exchange Acts about? Slide 17 Attempts indirect regulation by Disclosures and Shareholder Proposals -Requiring companies to provide detailed information about executive compensation to the shareholders What can the SEC do? Slide 18 The SEC enacted regulation that tried to make corporations show a link between compensation and performance. What else can the SEC do? Slide 19 SEC adoption of rules that expanded the compensation and performance disclosures required a proxy statements. 1. A table showing compensation of the companys five highest paid executives. 2. A performance graph comparing the companys five year cumulative. 3. A report from the compensation committee presenting its rational. How did they do that? Slide 20 To provide a link between a firms pay practices and its financial performance. Why are disclosures needed? Slide 21 Doesnt look like it. Check out the link on recent executive excesses. Has Reform helped? Slide 22 The Sarbanes-Oxley Act of 2002 sets high Standards of independence for Audit Committees Problem: They did not address the makeup of the compensation committee There is also the SEC governance rules of November 2003 on next slide What else can be done? Slide 23 For New York Stock Exchange and NASD. Require compensation committee to 1.Approve and operate under a charter (NYSE only) 2.Limit membership to independent directors 3.Review and approve corporate goals and objectives relevant to CEO performance 4.Approve CEO compensation based on goals and objectives 6.determine the CEO;s long term compensation based on companys performance and shareholder returns. Make recommendations to the board about non-CEO compensation, incentive compensation plan and equity based plans 7.Prepare an annual report on executive compensation to be included in companys annual proxy statement nextprevious Return To graph Slide 24 Executive compensation graph Bagley & Savage, Managers and the Legal Environment, chapter 21, 2006