SEC Proposes Rule on Comparing Executive Pay and Financial Performance

The SEC voted three to two (with Commissioners Gallagher and Piwowar dissenting) to propose rules that would require companies to disclose the relationship between their executive compensation and financial performance.

According to the SEC majority, the proposed rules implement a requirement mandated by Dodd-Frank and would not only provide transparency but also "allow shareholders to be better informed when they vote to elect directors and in connection with advisory votes on executive compensation."

The proposed rule would require a company to disclose its executive pay and performance information along with that of other companies in a peer group. The information would be formatted in a table and tagged in an interactive data format. The company would be required to disclose executive compensation actually paid for its principal executive officer using the amount already disclosed in the summary compensation table required in the proxy statement, making adjustments to the amounts included for pensions and equity awards. The amount disclosed for the remaining executive officers would be the average compensation actually paid to those executives. As the measure of performance, a company also would be required to report its total shareholder return ("TSR") and the TSR of companies in a peer group.

With the exception of small companies, all companies would be required to disclose this information for the last five fiscal years. Smaller reporting companies would be required only to provide disclosure for the last three fiscal years. The proposed rules include phase-in periods for these requirements.

In a statement, Commissioner Gallagher objected to a number of components of the proposed rule, explaining that pressing issues in the equities and fixed-income markets require more of the SEC's attention than do Dodd-Frank's "intrusions into the realm of corporate governance." Commissioner Stein supported the proposal and stated that the rulemaking "thoughtfully fulfills" the Dodd-Frank mandate.

Belosa Comment: For decades, companies have disclosed executives' compensation, in many cases in great detail. What this rule does is to create a uniform standard for reporting named executive officer compensation by requiring specific standardized tables and information. In theory, this should permit wider comparisons between and among peer companies' executive compensation paid relative to performance.

Click here to view a summary of the proposal by Delta Strategy Group.See:Text of Proposed Pay Versus Performance Rule; SEC Press Release and Fact Sheet.See also: Commissioner Gallagher's Statement of Dissent; Commissioner Stein's Statement of Support; Chair White's Opening Statement.