SEC proposes pay-versus-performance rules

The Securities and Exchange Commission (SEC) on April 29, 2015 voted 3-2 to propose rules that would implement the Dodd-Frank Act’s pay-versus-performance provision. The new rules would provide greater transparency and allow shareholders to be better informed when they vote to elect directors or vote on executive compensation. Comments are due 60 days after they are published in the Federal Register.

The pay-versus-performance proposal would implement provisions in Dodd-Frank Act Section 953(a). The new disclosure will be contained in proxy or information statements and will require a new tabular presentation showing the compensation actually paid to a company’s principal executive officer (i.e., the amount in the summary compensation table with some adjustments). For other named executive officers for whom disclosure is currently required in the summary compensation table, a company would disclose the average compensation actually paid to them.

Under the proposal, executive compensation actually paid would be calculated using compensation that companies report in the summary compensation table already required in the proxy statement as a starting point with adjustments relating to pension amounts and equity awards. Companies would be required to disclose the adjustments to the compensation as reported in the summary compensation table. Pension amounts would be adjusted by deducting the change in pension value reflected in that table and adding back the actuarially determined service cost for services rendered by the executive during the applicable year. Smaller reporting companies would not be required to make adjustments in pension amounts because they are subject to scaled compensation disclosure requirements that do not include disclosure of pension plans.

The new disclosure must include information about a company’s total shareholder return. This data can be presented according to the existing requirements for stock performance graphs contained in Item 201(e) of Regulation S-K. The proposal has an exception for foreign private issuers, registered investment companies, and emerging growth companies.

Larger reporting companies must include data on pay-versus-performance for the last five fiscal years, while smaller reporting companies need only include data for the past three years. But a phase-in applies for both large and small companies regarding the number of years covered. Smaller reporting companies also need not present a peer group TSR (total shareholder return).

Chair Mary Jo White said that the commissioners reviewed pre-comments submitted on this part of the Dodd-Frank Act and that the proposal retained flexibility to let a company address its specific situation. She also said she wants to hear from commenters on a range of topics, including how the pay-versus-performance information will be used, whether shareholders will use the information, and how smaller companies will use this data and bear the costs of its collection.

Source: Securities and Exchange Commission Press Release No. 2015-78, and Fact Sheet, April 29, 2015. SEC Release No. 34-74835.

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