On the surface, it looks like the Dodd-Frank financial reform law (financial reform news) is a watershed moment in the effort to better disclose and force some accountability on compensation issues. Some have suggested the law will transform compensation committees in the same way that Sarbanes-Oxley transformed audit committees. 

To be sure, the law is anything but silent on pay issues. Looking at everything from the much discussed say-on-pay provisions to the compensation disclosures to the hedging disclosure requirements of individuals to provisions for exchanges to develop "clawback" policies to proxy access rules, it's clear that compensation committees face some big challenges.

While grappling with new issues, these committees must also deal more directly with regulations, aiming to make them more able to prevent abusively generous pay policies. The Dodd-Frank Act requires, for example, national securities exchanges to mandate that each member of a company's Compensation Committee be independent. 

The law also requires compensation committees to only choose consultants, legal counsel and advisors after taking into consideration independence standards to be established by the SEC. The law also requires companies to pay for independent compensation consultants, lawyers and other advisors. By July 2011, enhanced disclosure will also be required in proxy statements of whether the committee has obtained a compensation consultant and if the consultant's work has raised any conflicts of interest and how they were addressed.

The issue here, as you might have guessed, is that a lot of the details have yet to be worked out. So while say-on-pay provisions will kick in as early as 2011, many other decisions will await determinations by the SEC. The clawback provisions, for example, have yet to be clarified, as the law directs stock exchanges to make a ruling. 

Overall, however, this may be somewhat hyped. One could argue that compensation committees will not be hugely inconvenienced. For one thing, the NYSE and Nasdaq already require independent members of the board to decide the big compensation issues. The whole idea of committee independence has indeed been a priority for several years. In addition, many compensation committees already utilize their own independent advisors and consultants.

Yet, we may see more strict independence tests flow from this at some point, and that may prompt turnover at some companies. Conflicts may arise if the consultant does work in other areas, such as benefits outsourcing, pension actuarial services and insurance brokerage, notes Bloomberg. Other challenges include the new reporting requirement, the so-called internal pay equity provision. "If interpreted literally by the SEC, the requirement to disclose the ratio of CEO to the median employee total compensation could become a reporting nightmare." Many companies will lack the data to do this right. 

As of right now, it's hard to see this as truly transformative. But it certainly encourages compensation committees to keep moving in the right direction, which is not a bad thing at all. - Jim