On April 29, the SEC proposed new rules to require companies to disclose the relationship between their executive pay and their financial performance. The goal is to provide shareholders with a new metric to assess a company’s executive compensation relative to its performance and to be able to compare that metric across a peer group. This would also provide shareholders additional information to increase transparency and help better inform them when they vote to elect directors or vote on executive compensation.
Monday, July 13. 2015
What Pay Versus Performance Reporting Would Entail
This information would be provided as part of any proxy or information statements that contain executive compensation disclosure and would be provided within a new table both in the body of the proxy or information statement (in HTML or text) and also provided in a separate exhibit, tagged in an interactive data format (XBRL). The location of the pay versus performance disclosure within the proxy or information statement would be determined by the registrant. Placing this disclosure within the Compensation Discussion and Analysis (CD&A) would make sense if the information within the disclosure influenced compensation decisions.
Information collected in this new table would include:
– the year the compensation was provided
– the executive compensation paid for the principal executive officer (this would be the total compensation as disclosed in the summary compensation table already present in the proxy statement with adjustments to the amounts included for pensions and equity awards)
– the compensation actually paid to the principal executive officer
– the average compensation paid for the remaining named executive officers identified in the summary compensation table
– the average compensation actually paid to the remaining named executive officers
– the company’s total shareholder return on an annual basis
– the total shareholder return on an annual basis of the companies in the peer group identified by the company in its stock performance graph or in its CD&A
Registrants would also need to provide footnote disclosure of the deductions and additions used to determine the executive compensation actually paid to the principal executive officer and the remaining executive officers.
Additionally, companies would be required to describe the relationship between the executive compensation actually paid to its principal executive officer and its named executive offers and the company’s total shareholder return as well as the relationship between the company’s total shareholder return and the total shareholder return of its peer group. The relationship disclosure could be provided as a narrative or graphically or using both mediums.
As part of the proposed rule, a phase-in would require three years of data to be reported in the first year that this data is reported, four years of data in the second, and five years of data once the phase-in is completed. However, smaller reporting companies would only need to provide three years of data. Smaller reporting companies would also be exempt from the peer group comparison.
Foreign private issuers, registered investment companies, and emerging growth companies would be exempt from this rule.
Novaworks provides a free fact sheet that outlines the requirements for this disclosure.
Comments that have been received by the SEC regarding this proposed rule are available here: http://www.sec.gov/comments/s7-07-15/s70715.shtml.
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