The Securities and Exchange Commission has finally set a date for considering a “pay for performance” rule regarding executive compensation. On April 29 the Commission likely propose new requirements that “registrants disclose, in a clear manner, the relationship between executive compensation actually paid and the financial performance of the registrant.”
Those disclosures, a requirement of the Dodd-Frank Act, will explain how executive pay (including annual bonuses, and long term incentives) corresponds to company performance. Disclosures will need to detail how company performance is defined and analyzed.
While nearly 60 percent of public companies have conducted an executive-pay-for-performance analysis, nearly two-thirds of them either did not tell shareholders the results or even disclosed that the analysis took place in their 2014 proxy statements, according to recent research by professional services firm Towers Watson. When asked why they did not discuss their pay-for-performance analysis, 76 percent of 104 public companies surveyed said they were waiting for the new SEC disclosure rules to be issued; one-third said they were also concerned about setting a precedent that will require similar disclosure in the future.
Towers Watson also found that the majority of respondents analyze pay-for-performance alignment in ways that may or may not mesh with what the SEC may ultimately require. Among companies that conducted a pay-for-performance analysis, nearly all (96 percent) compared their performance and shareholder returns to a company-defined peer group. The majority of respondents used a three-year period to measure performance; 60 percent used a definition of compensation other than that disclosed in the Summary Compensation Table required by the SEC.
While total shareholder return is the most common measure of performance that responding companies analyzed, most assessed their performance using both Total Shareholder Return and a measure of operating financial performance.