After years of sitting on the shelf, the pay vs. performance rule mandated by the Dodd-Frank Act was adopted by the Securities and Exchange Commission (SEC) on Thursday.
The SEC reopened comment on the rule in January, its first action related to pay vs. performance since an initial comment period in 2015. Gary Gensler, chair of the agency, has committed early in his tenure to seeing through the unimplemented portions of Dodd-Frank, passed in 2010 in response to the 2008 financial crisis.
The pay vs. performance rule requires public companies to disclose information reflecting the relationship between executive compensation actually paid and the firm’s financial performance. The information must be included in accordance with Item 402 of Regulation S-K for the registrant’s five most recently completed fiscal years (three years for smaller reporting companies).
The rule will become effective 30 days after publication in the Federal Register, with a compliance deadline for proxy and information statements required to include executive compensation disclosures for fiscal years ending on or after Dec. 16, 2022. Registrants other than smaller reporting companies must include information for three years in the first proxy or information statement in which they provide the disclosure, while smaller reporting companies are required to provide two years of information. Additional years will be required in subsequent annual proxy filings.
The details for principal executive officers and other named executives must be included in a table identifying the following financial measures:
- Total shareholder return (TSR);
- TSR of companies in the registrant’s peer group;
- Net income; and
- A financial performance measure chosen by the registrant.
“Using the information presented in the table, registrants will be required to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group,” the SEC explained in a press release. “A registrant will also be required to provide a list of three to seven financial performance measures that it determines are its most important performance measures for linking executive compensation actually paid to company performance.”
Flexibility was added to the final rule regarding financial performance measures; the original proposal required companies to name and rank five measures.
Overall compliance costs of the final rule should be modest, the SEC determined, given the “minimal new information” disclosures will require.
To this point, Commissioner Hester Peirce took issue.
“The primary benefit of the rulemaking is in the new presentation of information that generally is already disclosed elsewhere and the comparability the commission hopes the tabular presentation will produce,” said Peirce in a dissenting statement. “But, the fundamental variation across companies’ compensation practices and the underlying assumptions some of the disclosures necessitate will render the new presentation anything but clear and comparable.”
Commissioner Mark Uyeda also did not support the rule, expressing his disappointment the reproposing of the rule in January, which was before he joined the agency, was not updated with economic analysis and greater data available today.
“Rather than taking the more appropriate route of reproposing the pay versus performance rule with updated data and analysis, the commission bypassed having an effective notice-and-comment process as required by the Administrative Procedure Act in favor of a procedural shortcut,” he said.
Each commissioner acknowledged the need to fulfill mandates by Congress but questioned the rule’s effectiveness this far from its original intentions.
The Democratic majority at the SEC described adoption of the rule as a win for shareholders seeking to assess a public company’s decision-making regarding executive compensation policies.
“I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies,” said Gensler in a statement. “That serves investors and our markets.”