SEC Proposes Pay Versus Performance Disclosure Rules Mandated Under Dodd-Frank
On April 29, 2015, the Commissioners of the SEC voted three-to-two along party lines to propose a rule implementing the pay versus performance ratio disclosure mandated under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Proposed Rule”). The Proposed Rule will require U.S. reporting companies (excluding emerging growth companies and foreign private issuers) to disclose the relationship between executive compensation actually paid and financial performance.
For the first time, U.S. reporting companies will need to calculate compensation “actually paid” to the Principal Executive Officer (“PEO”, i.e. the Chief Executive Officer) and average compensation “actually paid” to the other named executive officers and provide a clear description of the relationship between compensation “actually paid” to the company’s cumulative total shareholder return (TSR) over the last five fiscal years. The proposal also requires a description of the relationship between the company’s TSR and that of a peer group selected by the company.
Similar to the proposed CEO Pay Ratio requirements, the utility of the pay versus performance disclosure required under the Proposed Rule was hotly debated amongst the five SEC Commissioners. There are disparate perspectives on whether this pay versus performance disclosure will provide meaningful insight into a company’s pay programs or performance levels.
The SEC is proposing to require the pay versus performance disclosure in annual proxy statements because it believes that the proposed disclosure would be “most useful” to shareholders when they are deciding whether to approve the compensation of named executive officers through the Say on Pay vote, as well as in making voting decisions on an executive compensation plan and election of directors.
The Proposed Rule requests extensive and detailed comments, including responses to the 64 questions specifically asked by the Staff. Comments will be due 60 days after publication of the proposal in the Federal Register.