The Securities and Exchange Commission (SEC) has published proposed amendments1 to the Securities Exchange Act that would require new executive pay disclosures for certain registered companies. The proposal is a mandate of the 2010 Dodd-Frank Act and aims to give shareholders and the public greater clarity on the relationship between executive compensation “actually” paid and the financial performance of a company.

If finalized in its current form, the rules would require companies to include a table in annual proxy filings that discloses top executives’ “actual pay” and its relationship to total shareholder return (TSR). Actual pay is a new figure based on total compensation companies already calculate for their five highest-paid executives, but excludes certain components of compensation that officers don’t actually take home, such as share grants that have yet to vest. TSR is the annual change in stock price plus reinvested dividends.2

The proposed amendment would require pay-versus-performance disclosures for all SEC-registered companies other than foreign private issuers, registered investment companies, and emerging growth companies, which are statutorily exempted from the requirement.

Public statements

In advance of releasing the proposal, SEC Chair Mary Jo White gave a public statement3  that outlined the objectives and development process of the proposed amendment. White stressed her interest in receiving public comment on the proposal and specifically on the appropriateness of the proposed metrics such as total shareholder return, how the information will be used, whether shareholders will use the information for investing or voting decisions, and the costs to the companies of providing the information.

In response to Chair White’s statement, Commissioner Daniel M. Gallagher offered a dissenting statement4 noting his concerns with the proposed pay-for-performance amendment. Gallagher proposed an alternative performance standard requiring large registrants to disclose how they evaluate executive compensation relative to performance, rather than using prescriptive definitions and disclosures of actual pay and total shareholder return—noting the ability of companies to game both metrics and the potential for lack of true comparability of these metrics across companies.

Proposed requirements

The proposed amendment would require pay-versus-performance disclosures for all companies other than foreign private issuers, registered investment companies, and emerging growth companies, which are statutorily exempted from the requirement. Smaller reporting companies would be subject to the requirements, but the proposal includes scaled disclosure requirements for these companies and the requirements for them would be phased-in over time. Companies would be required to provide information in an interactive data format, XBRL (eXtensible Business Reporting Language), and the requirement would be phased-in for smaller reporting companies.

The proposed rules would require disclosure about the named executive officers for whom disclosure is currently required in the summary compensation table, with new adjustments relating to pension amounts and equity awards. The disclosures would be required in the following tabular format for each of the last five completed fiscal years, with the exception of smaller reporting companies that would only be required to provide disclosure for the last three fiscal years:5

Year
(a)
Summary Compensation Table Total for Principal Executive Officer (PEO)6
(b)
Compensation Actually Paid to PEO
(c)
Average Summary Compensation Table Total for non-PEO Named Executive Officers
(d)
Average Compensation Actually Paid to non-PEO Named Executive Officers
(e)
Total Shareholder Return
(f)
Peer Group Total Shareholder Return
(g)

Source: Pay Versus Performance, Securities and Exchange Commission, Proposed rule, 17 CFR Parts 229, 240, 249, Release No. 34-74835; File No. S7-07-15. Access at: http://www.sec.gov/rules/proposed/2015/34-74835.pdf

In addition, the disclosures must include narrative and/or graphical descriptions of the relationship between the executive compensation actually paid and the company’s TSR, and the relationship between TSR and the TSR of a peer group.

Takeaways for clients

Reporting the additional executive compensation metrics would require several incremental calculation and control processes, but the requirements should not be burdensome for most reporting companies.

Companies should develop strategies for how they would qualitatively describe the linkage between executive compensation and TSR, and just as importantly the factors that drive their individual TSR results in a given period. In addition to management’s performance, TSR is a metric that can be influenced through accounting practices, short-term spending cuts, one-time events such as acquisitions or divestitures, as well as external conditions.

Comments on the SEC’s proposal are due no later than 60 days after publication in the Federal Register, and the rule could be effective as early as the 2016 proxy season.

References

  1. “Pay Versus Performance,” Securities and Exchange Commission, Proposed rule, 17 CFR Parts 229, 240, 249, Release No. 34-74835; File No. S7-07-15. Access at: http://www.sec.gov/rules/proposed/2015/34-74835.pdf
  2. “SEC is Set to Propose New Rules on Executive Compensation,” Wall Street Journal, April 28, 2015. Access at: http://www.wsj.com/articles/sec-is-set-to-propose-new-rules-on-executive-compensation-1430264535 (access required)
  3. “Statement at Open Meeting on Cross-Border Security-Based Swap Rules Regarding Activity in the United States and Pay Versus Performance,” U.S. Securities and Exchange Commission, SEC Chair Mary Lo White, public statement, April 29, 2015. Access at: http://www.sec.gov/news/statement/statement-at-open-meeting-april-29-2015.html
  4. “Dissenting Statement at an Open Meeting Proposing Mandated Pay versus Performance Disclosures,” U.S. Securities and Exchange Commission, Commissioner Daniel M. Gallagher, public statement, April 29, 2015. Access at: http://www.sec.gov/news/statement/dissent-proposing-mandated-pay-versus-performance-disclosures.html
  5. “Pay Versus Performance,” Securities and Exchange Commission, Proposed rule, 17 CFR Parts 229, 240, 249, Release No. 34-74835; File No. S7-07-15. Access at: http://www.sec.gov/rules/proposed/2015/34-74835.pdf
  6. “Title 17: Commodity and Securities Exchange,” Electronic Code of Federal Regulations, Chapter II, Part 229, Subpart 229.400. Access at: http://www.ecfr.gov/cgi-bin/text-idx?SID=ccbb6aaccdc465d8aaace9d4fa143b7d&mc=true&node=se17.3.229_1402&rgn=div8

Newsletter Author: Craig Unterseher

Newsletter Contact Person: Craig Unterseher

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Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is produced by Accenture as general information on the subject. It is not intended to provide advice on your specific circumstances.

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