Compliance Week: Companies Prepare for Executive Pay, Performance Disclosure

Compliance Week: Companies Prepare for Executive Pay, Performance Disclosure

August 2 2011

In the next few months the Securities and Exchange Commission is scheduled to propose rules stemming from the Dodd-Frank Act requirement that companies disclose “information that shows the relationship between executive compensation actually paid and the financial performance of the issuer,” known as “pay for performance.”

Steven Hall, managing director at pay consulting firm Steven Hall & Partners, says that a simplified, communicable strategy is the best approach.  Everyone involved in the company, from the compensation committee to investor relations executives, should work together to ensure shareholders understand fully the company’s compensation structure and performance metrics, he says.  “Start by educating your shareholder now through CD&A,” Hall says.

By understanding the relationship between performance metrics used and compensation, shareholders will have a better picture of how company determines executive pay.  Hall says although the SEC has yet to implement the rule and it may not be in place for next spring’s proxy statements, companies should be given compensation performance measures in CD&A next year anyway.  He urges companies to consider including data on revenue and profit growth and shareholder return, along with non-financial goals, such as plans for the company’s development.

“Nobody really knows what the SEC wants to do at this point,” Hall says.  Part of the problem, according to Hall, is the difficulty in interpreting the regulation and identifying the requirement of financial performance in legal terms.  Measuring compensation against financial performance will eliminate qualitative consideration from the picture, he explains, and not everyone will like that.  “I believe that what we are going to see are some adjustments by the SEC to incorporate relevant business measures in the performance; both financial and qualitative,” he says.

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