United States: SEC Proposes New Executive Pay Versus Company Performance Disclosure Rules

Wanda B. Whigham is a Senior Counsel in our West Palm Beach office.

HIGHLIGHTS:

  • The proposed rules will require larger reporting companies to provide tabular and narrative disclosure in proxy and information statements which describe the relationship between: (1) executive compensation actually paid to the reporting company's named executive officers and the financial performance of the reporting company and (2) the reporting company's financial performance and the financial performance of its peer group, over the last five fiscal years.
  • Smaller reporting companies will only be required to provide such information for three fiscal years and are excluded from the peer group requirement.
  • Executive compensation actually paid represents the total compensation reported in the reporting company's summary compensation table with adjustments to the amounts included for pension benefits and equity awards.
  • Financial performance of the reporting company is measured as cumulative total shareholder return (share price appreciation and dividends or distributions).
  • In addition to the tabular and narrative disclosure, the proposed rules will require that reporting companies tag information in the disclosure in an interactive data format using eXtensible Business Reporting Language (XBRL) to facilitate analysis of data.
  • Emerging growth companies, foreign private issuers and registered investment companies will be exempted from these requirements. Otherwise, all Exchange Act reporting companies will be required to comply with the new rules.

On April 29, 2015, the Securities and Exchange Commission (SEC) voted 3 to 2 to propose rules related to the disclosure of information that shows the relationship between executive compensation and the financial performance of most Exchange Act reporting companies. The proposed rules are intended to implement Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which directs the SEC to adopt rules requiring registrants to disclose such compensation information in any proxy or consent materials for an annual meeting of shareholders. The proposed rules will not apply to emerging growth companies, foreign private issuers or registered investment companies (other than business development companies).

SEC Seeking Consistency to Improve Comparability Between Companies

Under the SEC's proposed rules, most Exchange Act reporting companies would be required to provide pay versus performance disclosures in proxy and information statements with respect to the election of directors or executive compensation matters. Through the proposed rules, the SEC seeks to create consistency in how the disclosed information is determined in order to increase comparability between companies for shareholders that are deciding on whether to approve executive pay and other matters through the shareholder's say-on-pay advisory vote. As Commissioner Stein stated in her support for the proposed rules, "[i]t should make it easier for shareholders to locate, understand, and analyze executive compensation information before they have to vote."

The proposed pay versus performance disclosure rules provide for a description of the relationship between compensation actually paid to named executive officers and the cumulative total shareholder return (TSR) of the company over five fiscal years (three fiscal years for smaller reporting companies). Larger reporting companies would also be required to disclose the relationship between such company's TSR and the TSR of the company's peer group (using the peer group identified in its stock performance graph or in its compensation discussion and analysis) for the same time period.Executive compensation actually paid will be calculated as the total compensation disclosed in the company's summary compensation table (Item 402(c) of Regulation S-K), adjusted to (i) exclude changes in actuarial present value of benefits under defined benefit and actuarial pension plans that are not attributable to the applicable year of service, and (ii) include the value of equity awards at vesting rather than when granted.

Specific Table Format for Required Information

The required information would be provided in a prescribed table format setting forth:

  • total executive compensation reported in the summary compensation table for the principal executive officer (PEO),
  • average total compensation from the summary compensation table for non-PEO named executive officers,
  • compensation actually paid to the PEO,
  • average compensation actually paid to non-PEO named executive officers,
  • TSR, and
  • for larger reporting companies, TSR of the company's peer group.

The table would include footnotes to explain amounts deducted from and added to the total compensation amounts in the summary compensation table. The SEC proposes that the information set forth in the table, including any footnote disclosure, will be provided in interactive data format using XBRL. Such interactive data would allow the reporting company to tag separately the values disclosed in the required table, and to separately block-text tag the disclosure of the relationship among the measures, the footnote disclosures of deductions and additions used to determine executive compensation actually paid, and the footnote disclosure regarding vesting date valuation assumptions. The list of tags to be specified by the SEC are intended to allow shareholders to compare such data across companies.

In addition to the table, the proposed rules would require the company to describe both the relationship between the executive compensation actually paid and the company's TSR and, in the case of larger reporting companies, the relationship between the company's TSR and the identified peer group's TSR. The description of such relationships could be provided as a narrative, graphically, or as a combination of the two.

Differing Views Held by the Commissioners on Proposed Rules

Commissioners that support the proposed pay versus performance rules believe that the new rules would provide consistent, meaningful new information to shareholders to determine whether executive compensation and decisions by a company's board of directors with respect to compensation matters are consistent with the overall financial performance of the company. However, Commissioners that oppose the proposed rules question whether the new rules are too prescriptive and fail to take into consideration how the reporting company evaluated executive compensation. Although the proposed rules allow for supplemental disclosures to incorporate company-specific evaluation of compensation matters, opponents believe that such supplemental information will not be taken into consideration when comparisons are made of tagged information that bears no relationship to the evaluation process of the company's board of directors. The SEC is seeking comments regarding the proposed pay versus performance rules, including its analysis of the potential effect of the proposed rules. Comments are due to the SEC 60 days from the date the proposed rules are published in the Federal Register. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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