Rules Would Implement a Requirement Mandated by the Dodd-Frank Act
On April 29, 2015, the SEC proposed rules on the disclosure of executive pay versus company performance. The proposed rules implement Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which directs the SEC to adopt rules requiring public companies to disclose the relationship between executive compensation actually paid and the financial performance of the company.
Highlights of the Proposed Rules
According to the SEC, the proposed disclosure would be required in proxy or information statements in which executive compensation disclosure is required.
Further, the proposed rules would require companies to disclose in a new table the following information:
- Executive compensation actually paid for the principal executive officer, which would be the total compensation as disclosed in the summary compensation table already required in the proxy statement with adjustments to the amounts included for pensions and equity awards. The amount disclosed for the remaining named executive officers identified in the summary compensation table would be the average compensation actually paid to those executives
- The total executive compensation reported in the summary compensation table for the principal executive officer and an average of the reported amounts for the remaining named executive officers
- The company's total shareholder return on an annual basis, using the definition of total shareholder return (TSR) included in Item 201(e) of Regulation S-K, which sets forth an existing requirement for a stock performance graph
- The TSR on an annual basis of the companies in a peer group, using the peer group identified by the company in its stock performance graph or in its compensation discussion and analysis
The disclosure would be required for the last five fiscal years, except that smaller reporting companies would only be required to provide disclosure for the last three fiscal years. Smaller reporting companies would not be required to present a peer group TSR because they are not required to disclose an Item 201(e) performance graph or a compensation discussion and analysis.
Using the information presented in the table, companies would be required to describe the relationship between the executive compensation actually paid and the company's TSR, and the relationship between the company's TSR and the TSR of its selected peer group. This disclosure could be described as a narrative, graphically, or a combination of the two.
Total Shareholder Return of the Company's Peer Group
The proposed rule would permit companies to use either the same peer group used for purposes of the stock performance graph or the peer group used in connection with the company's compensation benchmarking practices disclosed in the Compensation Discussion and Analysis. For purposes of the Pay Versus Performance table, the cumulative TSR of the company's peer group would be calculated in the same manner and over the same measurement period as under Item 201(e) of Regulation S-K.
The proposed rule requires additional disclosure following the Pay Versus Performance table on the relationship between the executive compensation actually paid and the company's TSR and the relationship between the company's TSR and the TSR of its peer group. Companies would be permitted to describe these relationships in a narrative disclosure, graphic disclosure or a combination of the two. Examples provided by the SEC of acceptable forms of this disclosure include a graph providing executive compensation actually paid and change in TSR on parallel axes and plotting compensation and TSR over the required time period. The SEC also suggested that companies could disclose the percentage change over each year of the required time period in both executive compensation actually paid and TSR together with a brief discussion of that relationship.
Format of Disclosures
In the first filing following the effectiveness of the proposed rule, companies would be required to provide the new disclosure for the last three fiscal years, instead of five. An additional year of disclosure would then be required in each of the two subsequent annual filings in which the disclosure is required. Pay-versus-performance disclosure would only be required for years in which a company was a reporting company pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. Accordingly, a newly-reporting company would be required to provide the pay-versus-performance disclosure only for the last fiscal year in the first year as a reporting company and for the last two fiscal years in its second year as a reporting company. Emerging growth companies and foreign private issuers would be exempt from these new disclosure requirements.
Note: Public comments are due within 60 days following the publication of the proposed rule in the Federal Register.