Evaluation of Dodd-Frank Act Executive Compensation Provisions

Using IDEC Project Principles

by Don Delves
The Dodd-Frank Act is a sweeping piece of legislation that has major implications for executive
compensation and the role of the compensation committee. The Act has significant positives and
negatives. To better understand its potential impact, we used the principles developed by the
Independent Directors Executive Compensation Project to evaluate key provisions of the Act.
The results are summarized as follows:

IDEC Principles

Dodd-Frank
Alignment Accountability Engagement Fairness Transparency
Provision

Mandatory
Say-on-Pay Vote + + - - +
Mandatory
Clawbacks + + - +/- +/-
Pay Equity
(CEO Pay Multiple) -
-


Pay vs.
Performance + +

+
Disclosure

Overall + + -
+

Rating Scale: + = Positive demonstration of principle

= Neutral relative to principle
- = Detracts from principle

Summary:
Overall, the Dodd-Frank executive compensation provisions may result in improved alignment
with shareholders, greater accountability to shareholders and more transparency; however, the
provisions may impose significant cost in terms of executive engagement, motivation and
positive risk-taking.

The detailed basis for the scoring is provided on the following pages.

© IDEC Project 1 9/28/2010

 Mandatory Say-on-Pay Vote
Principle Rating Description

Shareholders will only vote in favor of a company's compensation

Alignment + programs if they see them as aligned with their interests (or at least not
grossly misaligned).

Say-on-pay directly increases the accountability of compensation

Accountability + committees to shareholders.

Say-on-pay votes are a potential distraction to management and the board

and do not necessarily result in improved incentives or motivation to
Engagement - perform. Say-on-pay could result in less risk-oriented pay packages, less
upside for extraordinary performance and less motivation to innovate and
excel.

The all-or-nothing nature of the vote is not fair to shareholders, the board or
Fairness - management.

Say-on-Pay will promote increased transparency and communication with

Transparency + shareholders through a variety of media.

Mandatory Clawbacks
Principle Rating Description

Clawbacks inflict the same or more pain on executives as that inflicted on

Alignment + shareholders due to material financial restatements.

Strict clawbacks significantly increase accountability between shareholders

Accountability + and executives -- perhaps too much?

The possibility of clawbacks may be a distraction to management and may

result in less risk taking and innovation. They may also result in more
Engagement - subjective, discretionary incentives which would be harder to reverse in the
event of a restatement.

Clawbacks are fair for executives who were responsible for the company's
+ financial restatement.
Fairness
Clawbacks could create a situation where the company is required to seek
- money from individuals who performed well, did no wrongdoing and did not
contribute to the financial restatement.

Clawbacks create a clear, although sometimes harsh, policy that should be

+ transparent to all parties.
Transparency
Mandatory clawbacks could induce companies to obfuscate the tie between
- pay and performance making it purposefully more difficult to recalculate
bonuses in the event of a financial restatement.

© IDEC Project 2 9/28/2010

 Pay Equity (CEO Pay Multiple)
Principle Rating Description

Pay ratios do nothing to increase alignment with shareholders. The

Alignment - administrative cost and potential public relations cost are potentially
detrimental to shareholder interests.

Accountability
Calculating this ratio neither improves nor detracts from accountability.

Administrative and public relations costs will at best be detrimental and

Engagement - distracting.

The intent of this ratio is to foster greater compensation fairness internally;

Fairness
however, the bluntness of the measure may render it meaningless.

The intent of this ratio is to foster greater compensation transparency

Transparency
internally and externally; however, the bluntness of the measure may render
it meaningless.

Pay vs. Performance Disclosure

Principle Rating Description

May result improved tie between pay and performance. However, if SEC
Alignment + mandates specific performance measures, the linkage could be less clear
for specific companies.

Accountability + See above.

Not clear that this disclosure will add or detract from executive motivation
Engagement
and engagement.

Not clear that this disclosure will add or detract from fairness to any
Fairness
affected party.

The concept of showing pay vs. performance is a positive one and may
Transparency + promote a greater level of transparency.

© IDEC Project 3 9/28/2010