Dodd-Frank Update Overview of Remaining Open Items

Dodd-Frank Update Overview of Remaining Open Items

Pay Ratio Companies required to disclose the ratio of the CEO pay to that of the median employee wherever summary compensation table data is disclosed, generally beginning with the 2018 proxy Companies will be required to disclose The ratio of these two amounts The median of the annual total compensation of all its employees, except the CEO The annual total compensation of its CEO A brief description of the methodology used to identify the median employee, and any assumptions, adjustments (including cost-of-living adjustments), or estimates used to identify the median employee or to determine annual total compensation of that median employee Companies are permitted, but not required, to supplement the required disclosure with a narrative discussion or additional ratios Additional discussion and/or ratios need to be clearly identified, cannot be misleading, and may not be presented with greater prominence than the required pay ratio Annual total compensation Annual total compensation is calculated in the same way as the total compensation value disclosed for named executive officers in the Summary Compensation Table Generally, the sum of salary, annual incentives, value of equity awards on date of grant, change in pension and nonqualified deferred compensation, and all other compensation When calculating annual total compensation for the median employee, the company may use reasonable estimates Estimated values must be identified and methodology for calculating them provided -1- June 2016

Pay Ratio Final regulations provide significant flexibility in how data for this ratio is collected Companies will be permitted to determine the median employee every three years Companies can select any date in the last three months of the fiscal year as the determination date However, calculation must reflect ALL employees part-time, seasonal and temporary workers employed on this date Companies may select a methodology for determining the median employee based on their own facts and circumstances Total employee population or statistical sampling of that population and/or other reasonable methods Examples of reasonable calculation methods include: Annual total compensation as determined under existing executives compensation rules Any consistently applied compensation measure from compensation amounts reported in its payroll or tax records Companies may make cost of living adjustments to compensation for employees not living in the same country as the CEO Must also select the median employee using unadjusted compensation and disclose the unadjusted ratio of median employee to CEO pay Companies will have the ability to exclude certain non-us employees in instances where Foreign data privacy laws would prevent compliance with the final rule, or The non-us workforce represents less than 5% of the total workforce -2- June 2016

Pay Ratio Things to do now Assure that you have the systems in place to pull the necessary data Review the data and model out what the pay ratio is likely to be Given that the company is unlikely to make any changes to pay levels for the CEO or the median employee, begin contemplating public disclosure in the CD&A, shareholder outreach efforts, the media and elsewhere, and which details may be helpful in providing context -3- June 2016

Clawbacks SEC released proposed rules in July 2015. Public comment period is now closed Proposed rule provides very little room for discretion on the part of the board or company to determine whether to pursue a clawback, from whom or how much Three year look-back from the date it is determined that a material restatement of financial results is necessary Will apply to all executive officers, including the company s president, principal financial officer, principal accounting officer (or if there is no such accounting officer, controller), any vice president in charge of a principal business unit, division or function, any other officer or person who performs a policy-making function for the company Clawback applies to any compensation that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure Financial reporting measure are any measures that are determined and presented in accordance with the accounting principles used in preparing the issuer s financial statements, any measures derived wholly or in part from such financial information, and stock price and total shareholder return Given current timetable and SEC disarray, highly unlikely that rule will become effective before 2017 at the earliest No action needed at this time While many companies already have a clawback policy in place, it will need to be modified to conform with this new rule once it has been finalized -4- June 2016

Pay versus Performance SEC released proposed rules in April 2015. Public comment period now closed Proposed rule will require inclusion of a new table and accompanying narrative disclosure comparing compensation actually paid to relative TSR for a five-year period Table to take the following form Year Summary Compensation Table Total for PEO Compensation Actually Paid to PEO Average Summary Compensation Table Total for non-peo named executive officers Average Compensation Actually Paid to non-peo named executive officers Total Shareholder Return Peer Group Total Shareholder Return The disclosure regarding the relationship between pay and performance would follow this table and could be described as a narrative, graphically, or a combination of the two. This description should also include a comparison of the cumulative TSRs for both the company and the peer group As proposed, performance definition limited to TSR relative to selected peer group Companies can select either the peer group utilized in the stock performance graph (per Item 201(e)) or the peer group used for executive compensation benchmarking purposes as disclosed in the CD&A If the peer group is not a published industry or line-of-business index, the identity of the issuers comprising the group must be disclosed -5- June 2016

Pay versus Performance Proposed rule will require inclusion of a new table and accompanying narrative disclosure comparing compensation actually paid to relative TSR for a five-year period (cont d) As proposed, compensation based on that actually paid, which is defined as Compensation as disclosed in the Summary Compensation Table LESS grant date value of stock and option awards LESS change in pension value and non-qualified deferred compensation earnings PLUS value of equity on date of vest Vesting options to be valued using Black-Scholes, not intrinsic value, on date of vest Excludes unvested equity PLUS pension values calculated based on the actuarial present value of the benefit attributable to services rendered in that year, excluding any value derived from modifications to actuarial assumptions Depending on when SEC finalizes the rules, not likely to be applicable before the 2017 proxy season at the earliest No action needed at this time -6- June 2016

Hedging Proposed rules announced in February 2015 Proposed rules do not prohibit hedging, but do require disclosure of company policies for all employees and directors with respect to shares awarded as compensation as well as other holdings In response to changes in ISS voting methodology, under which significant pledging and hedging of company stock by directors and/or executives are considered failures of risk oversight and may trigger against/withhold vote recommendations against directors, most companies now proactively disclose policies prohibiting this behavior in their proxies Depending on when SEC finalizes the rules, not likely to be applicable before the 2017 proxy season at the earliest No action needed at this time Most companies already have a policy prohibiting hedging which will likely satisfy the requirement under this rule as proposed -7- June 2016