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Beware the Law of Unintended Consequences — Especially When Dealing with Compensation

By Brent Longnecker and Josh Henke

“If you know the unintended consequences of your acts, you are in a better position to analyze the facts.” T. Ameed

A recurring theme within the compensation world that most compensation consultants take for granted is the law of unintended consequences. At Longnecker & Associates, we’re used to seeing new laws and regulations imposed on executive compensation, but we’ve learned to always brace ourselves for the aftershock. There are numerous examples of imposed regulations by the U.S. government, specifically the Securities and Exchange Commission (SEC), that seem sound on paper but cause ripples for public companies down the road. Some of these examples are IRC Sections 280G, 162(m) and the Dodd Frank Act of 2010. Dodd Frank is riddled with regulations that will certainly heighten scrutiny surrounding public company disclosures and empower shareholders. However, with the recent passing of the SEC’s proposed regulations on executive clawbacks and Pay for Performance disclosures, there will certainly be some blow back on public companies and potentially the U.S. exchanges.

A recent article entitled, “Will SEC executive compensation rules drive Canadian companies to delist?”, cites a potential for foreign companies to delist from U.S. exchanges due to the imposing regulations Dodd Frank will now require. The SEC proposed their final regulations on July 1, 2015 and added some key components to them. The regulations will require all public filers, including foreign companies listed on U.S. exchanges, to comply with these regulations. This will certainly translate into significant costs for compliance as it requires attention from the executive team, the board of directors, legal/compliance, HR, accounting, tax, audit and likely many more. Foreign companies trying to take advantage of the U.S. public exchanges will have to weigh the cost benefit to participate or make the decision to pull back their public shares to their local economies.

Bottom line, there are no perfect laws or regulations to satisfy all parties involved. However, the SEC may want to consider a more holistic approach to passing regulations that ultimately will affect all public filers. These are broad, sweeping changes that may in fact cause a pull back on the U.S. economy, one that our economy cannot afford. It’s time for us to stop thinking so linearly and to begin looking “around the corners of corners” like Navy Seals are trained to do. If we can ever effect that type of discipline, we can minimize the harmful effects of unintended consequences.

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