Proposed rule would require companies to make clearer disclosure of pay and performance information.
The U.S. Securities and Exchange Commission (SEC) last week proposed a new requirement that companies disclose executive compensation and financial profitability information in a way that would be easily comparable to peer companies. Dissenting SEC Commissioners believe the proposal is a waste of time and an intrusion into corporate governance.
Under the rule, publicly traded companies would be required to disclose executive pay and company financial performance information along with similar information for peer companies in interactive tables. The information would be required to cover the last five fiscal years for most companies, although smaller businesses would be required to provide information for only the previous three years.
Although the proposed rule would require executive pay and financial performance information to be highlighted in a formal disclosure to shareholders, this information is already available for those who delve into a corporation’s financial reports. By requiring an interactive disclosure that provides easily digestible information, the SEC hopes more shareholders will be better informed in assessing each company’s executive compensation relative to its financial performance.
The tables disclosed to shareholders would also include two measures of executive compensation. The proposed rule would require a table for certain executive officers reporting a summary of their compensation breaking down base pay and, for example, the value of equity rewards and pension benefits. The total compensation actually paid to those officers, including the value of these additional benefits, would then be included in the peer compensation tables.
Once it is made final, the proposed rule will become another in a line of executive compensation rules the SEC has issued under the Dodd-Frank Act. The 2011 so-called say-on-pay rule, for example, requires companies to hold nonbinding shareholder votes at least every three years on proposed compensation for executive officers. Although the votes are nonbinding, commentators have noted that the votes provide a “rallying point” for shareholders with more expansive complaints and pressure companies to change their pay practices even when the majority votes in favor of the compensation packages.
The SEC made a more controversial proposal in 2013 to require corporations to disclose the pay gap between chief executive officers and their employees. The agency has yet to finalize that proposed rule, and is not slated to do so until at least later this year.
As with the SEC’s 2013 proposed rule on disclosure of pay gaps, Republican SEC Commissioners Daniel Gallagher and Michael Piwowar voted against the proposal announced last week on pay and performance disclosure.
Commissioner Gallagher chastised the SEC for prioritizing its latest proposal over other matters more pressing to the financial sector, such as rules governing the equities and fixed income markets. “The last thing we need,” Gallagher said, “is to spend precious time thrusting ourselves into corporate governance matters best left to state law.” Instead of focusing on “more germane” rules required under the Dodd-Frank Act, Gallagher argued that this proposed rule continues the SEC’s unproductive “trudging … into the realm of corporate governance.”
Gallagher also argued against the approach taken in the proposed rule. Instead of requiring disclosure of pay and performance information, Gallagher said it would be better to require large companies to disclose “how they evaluate the executive compensation actually paid to the principal executive officer, versus the financial performance of the issuer.” Smaller companies, in Gallagher’s view, should be exempt from reporting these evaluation methods. The disclosure of evaluation methods would enable investors to evaluate using their own metrics the meaning of pay and performance in relation to the company’s evaluation of the relationship.
SEC Commissioner Luis Aguilar, however, said this supplemental requirement of easily accessible and comparable information would “better inform shareholders and give them information needed to hold directors accountable for the executive compensation decisions that they make.” According to Aguilar, the information disclosure would “serve to dissuade [boards of directors] from being complacent and simply rubberstamping the salaries of their executives.”
Interested readers can comment on the proposed rule until 60 days after its publication in the Federal Register.