William & Mary Business Law Review


Matt Reeder


Section 956 of the Dodd-Frank Act requires regulators to help prevent the next financial crisis by monitoring executive compensation arrangements to prevent them from becoming excessive or leading to “material financial loss.” A now-pending rule seeks to do just this. This Article argues that the rule is well-conceived inasmuch as it limits the total portion of compensation that can be based on risk-inducing incentives, ties incentive-based compensation to longer-term performance, places a ceiling on potential incentivebased earnings, provides for downward adjustment and clawbacks, prohibits many hedging behaviors, and institutionalizes governance mechanisms and oversight policies. But, by placing a number of scholars in conversation, the Article proposes a framework within which incentive-based compensation creates risk. Within this framework, the rule is insufficient to prevent systemic risk. Accordingly, this Article proposes that regulators add to the rule a requirement that companies disclose the full annualized value of key executives, subdivided and monetized into salary, benefits, incentive pay, and perquisites. Doing so will allow market actors to make important qualitative judgements about corporate risk taking. This disclosure requirement will complement the proposed regulatory mechanisms and allow regulators to verify compliance ex post as market actors mitigate risk ex ante.