Long ago and far away ... actually, it was on April 29, 2015, the Securities and Exchange Commission (SEC) proposed rules on the Dodd-Frank Act requirement that companies disclose the relationship between executive compensation actually paid and the financial performance of the company in their annual proxy statement. 

Long ago and far away ... actually, it was on April 29, 2015, the Securities and Exchange Commission (SEC) proposed rules on the Dodd-Frank Act requirement that companies disclose the relationship between executive compensation actually paid and the financial performance of the company in their annual proxy statement. Since then, much has happened, including summer vacations and the release of the more exciting compensation clawback rules. The P4P Disclosure rules are only proposed and are unlikely to be effective before the 2017 fiscal year proxy filed in 2018. However, there is an aspect of the P4P rules that Compensation Committees may want to consider this fall in preparation for the upcoming proxy season. This is especially true for Companies/Committees that use a performance metric other than relative Total Shareholder Return (TSR).

The proposed rules unambiguously rely on TSR as the basis for reporting the relationship between executive compensation and financial performance.* Thus, the SEC has placed its thumb heavily on the scale in favor of relative TSR as a performance metric. Committee members should understand that, because the rules will likely require companies to report their TSR and compare it in easy-to-read chart form against the average TSR of their peers, readers are likely to focus on the Company’s actual and relative TSR regardless of whether the Committee uses that metric to determine executives’ pay.

I suggest that Companies/Committees that don’t currently use relative TSR as a metric in executive pay will have two options. One is to switch to TSR as a performance measure, despite its many flaws. The other is to explain in the Compensation Disclosure & Analysis section why the performance metric the Committee uses to determine executive pay is better. Not impossible, but it may be a challenge to get proxy statement readers to continue reading the Committee’s explanation of the unique performance measures it actually uses. (Charts will be preferable to text.)

I just wanted to brighten your day with that reminder.