Take Two: SEC Reopens Proposed Rule on Executive Compensation Disclosures

Yesterday, the SEC reopened for comment a Dodd Frank-era proposed rule that would allow investors to more easily compare the compensation of public company executives to shareholder returns.

The SEC originally opened the proposed rule – dubbed the “pay versus performance” rule – in 2015.  It would require public companies to disclose to shareholders charts that compare the compensation of their principal executive officer and the average compensation of other officers with shareholder returns.  In the SEC statement that accompanied the proposed rule, SEC Chair Gary Gensler stated:

“This proposed rule would strengthen the transparency and quality of executive compensation disclosure. . . . The commission has long recognized the value of information on executive compensation to investors.”

The proposed rule is part of an effort to appease shareholder advocates, who claim that executive compensation is excessive and is not in line with companies’ financial results.

The proposed rule would use several broad metrics for comparing pay and performance:

• Executive compensation would be the amount “actually paid” to executives, including the value of equity awards at vesting.
• Performance would be based on cumulative total shareholder return (“TSR”) and potentially additional metrics that were not included in the 2015 proposal, including pretax net income.

The disclosures, which would be included in solicitation materials for annual shareholder meetings, would cover a five-year period for most companies.

The proposal states that the changes to the metrics would “lower the burden of analysis,” by presenting information “in a way that could make it easier to understand how pay relates to performance.”  Hester Peirce, however, the only remaining Republican member of the SEC, dissented on Thursday to reopening the rule, asserting that it “doubles down on a flawed proposal” and “would increase the burdens of public company reporting, but seems likely to be of dubious use to investors.”

SEC stated that it was reopening the rule for comments as a consequence of new developments in executive compensation practices since 2015.  SEC is requesting comments on two dozen questions which ask for information:  (1) about changes in the qualitative measures used in executive compensation packages since 2015; and (2) which qualitative measures other than TSR should be used.