In a July 13 speech delivered at the 66th National Conference of the Society of Corporate Secretaries & Governance Professionals, SEC Commissioner Troy A. Paredes stated that he has been and remains troubled that the Dodd-Frank regulatory regime goes too far. Paredes expressed his concern that "the present wave of regulation will prove to be excessive, unduly burdening and restricting our financial system and suppressing private sector innovation, entrepreneurism, and competition at the expense of our country's economic growth and global competitiveness."

Paredes specifically offered some thoughts on Section 954 of Dodd Frank (which provides for "clawbacks") and its impact on executive pay. Under Section 954, a company must claw back incentive compensation from any current or former executive officer who received incentive compensation during the three years before the company was required to restate its financials. Paredes said he could understand why many commentators find the “no-fault” nature of Section 954 "troubling." He offered the example of "an executive who has worked diligently and honestly at a company that has robust financial controls and top-notch procedures and systems" but who "may nonetheless have to pay back a considerable portion of his or her compensation if the company has to restate because of an accounting error."

Paredes said that even putting aside issues of fairness, Section 954 raised other "problematic" possibilities that may not be in the best interests of companies or their shareholders, including:

Will companies restructure compensation arrangements so that executives end up receiving less incentive pay that can be clawed back, but larger discretionary bonuses that are not explicitly linked to specific financial targets?

Will executives now press for higher base pay to compensate them upfront for the risk that the incentive compensation they do receive may have to be forfeited in the future? 

How might a shift from incentive-based pay toward more guaranteed pay impact an executive's incentives?

Will companies be discouraged from restating to avoid triggering the Section 954 clawback?

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