The Dodd-Frank reform is a financial reform passed by the Obama administration in 2010 as a respond to the financial crisis of 2008. The act has numerous provisions that are intended to decrease risks in the economy. The reform intended to decrease the risk in financial markets, provide transparency and accountability to executives, and allow stakeholders to have an opinion on executive compensation. Proponents of the law believe that it will help prevent a crisis like the one we faced in 2008 but critics believe that it will hinder economic growth. During this assignment will focus on questions regarding executive pay and the regulations placed by the Dodd-Frank reform. Questions
1. Has Dodd-Frank succeeded in controlling executive pay? Should the government put more regulatory constraints on executive pay? Explain your answer. Do a search to determine if there is any new or pending legislation or regulation that would regulate executive pay.
Investors are beginning to recognize the negative effects of excessive executive pay. Not only does it affect the company’s net income and share price, but it also provides insights on the alignment between executives and shareholders. The amount of compensation also provides information about the effectiveness of a board’s independent oversight (Bloomberg, 2012). If the board of directors cannot manage a CEO’s pay, they will also have a difficult time controlling a failing business strategy or a financial emergency. Four years after the Dodd-Frank was implemented, investors have had many opportunities to reject pay plans for executives. Shareholders said no to pay packages to about 50 companies in 2012 (Bloomberg 2012). Some of these companies include big corporate names like Citigroup, Wells Fargo and Bank of America. I do not agree with an increase in regulatory constraints aimed to control executive pay. I believe that regulating compensation can have a negative effect on a company. According to Ira kay from Harvard Business Review, research has shown that the traditional pay model using cash and stock incentives is beneficial for the vast majority of companies. The pay incentives motivates leaders to increase the performance of the companies (Kay, 2009). Furthermore, the Directors have perceived the concerns of the stakeholders and have started diminishing executive payments.
2. Do you agree with the argument that executive pay is based on external market analysis (the principle of external equity) and is thus fair?
I believe that executive pay is based on external market analysis. Ira Kay and Steven Van Putten research argues that labor markers for executives are actually competitive, and that pay levels track corporate performance (Kay,Van Putten, 2010). I agree with the notion that executive pay is based on the salaries of others in the industry in a similar position. I do not think that payment based solely on similar salaries in the industry is fair. I believe that executive pay should be based on experience and performance on an individual. The size and financial strength of the company should also be considered.
3. Have the clawbacks provisions in the Dodd-Frank law had an effect on executive pay? Since the clawback provision in the Dodd-Frank law was intended to make executives understand that there are financial consequences in their behavior (or lack of it) hurt their firm, liability insurance for this provision is now available. To what extent does insuring against clawback subvert the point of the law?
The clawback provision one that requires firms to recover pay received by executives if there are any material errors in the company’s financial statements or if they break any laws during in the job. This policy will increase the firm’s value by recapturing overpayments to executives and by adding financial security to the company.
Many insurance companies are insuring against the clawback provision of the...
References: Bloomberg. (2012, July 19). More Shareholders Are Just Saying No on Executive Pay. Retrieved March 23, 2015, from http://www.bloomberg.com/news/articles/2012-07-19/more-shareholders-are-just-saying-no-on-executive-pay
Cuoco, M. (2011, August 23). D&O Insurer Offers Clawback Protection | Compliance Week. Retrieved March 24, 2015, from http://www.complianceweek.com/news/news-article/do-insurer-offers-clawback-protection
Fox, M. (2014, April 23). Overpaid CEOs, what have you done for us lately? Retrieved March 25, 2015, from http://www.cnbc.com/id/101608240
Kay, I. (2009, June 8). Regulating CEO Pay Is Not the Answer. Retrieved March 24, 2015, from http://hbr.org/2009/06/ceo-pay-regulation-can-do-real
Kay, I., & Van Putten, S. (2010, September 10). Policy Analysis. Retrieved March 24, 2015, from http://object.cato.org/sites/cato.org/files/pubs/pdf/pa-619.pdf
LUCCHETTI, A. (2011, March 31). Big Banks Back 'Say on Pay ' Retrieved March 23, 2015, from http://www.wsj.com/articles/SB10001424052748704530204576235292116839896
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