Today the SEC approved proposed rules requiring companies to disclose in their annual proxy statement information that shows the relationship between executive compensation actually paid and the financial performance of the issuer under Dodd-Frank Act Section 953. In a refreshing change, the approval process came at an open meeting. (By coincidence, on May 6, 2015, I will be speaking at a luncheon meeting of the Carolinas Chapter of NASPP on Performance Awards: Limitations, Drawbacks and Traps!)

Section 953(a) reads as follows:

SEC. 953. EXECUTIVE COMPENSATION DISCLOSURES.

  1. DISCLOSURE OF PAY VERSUS PERFORMANCE.— Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n), as amended by this title, is amended by adding at the end the following:
    1. DISCLOSURE OF PAY VERSUS PERFORMANCE.—The Commission shall, by rule, require each issuer to disclose in any proxy or consent solicitation material for an annual meeting of the shareholders of the issuer a clear description of any compensation required to be disclosed by the issuer under section 229.402 of title 17, Code of Federal Regulations (or any successor thereto), including information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions. The disclosure under this subsection may include a graphic representation of the information required to be disclosed.

I have not been able to read the entire release containing the proposed rules yet, but some of the highlights are as follows:

  • The proposed rules rely on Total Shareholder Return (TSR) as the basis for reporting the relationship between executive compensation and the company’s financial performance.
  • Based on the explicit reference to “actually paid” in Section 14(i), the proposed rules exclude unvested stock grants and options, thus continuing the trend to reporting realized pay. Executive compensation professionals will need to sharpen their pencils to explain the relationship between these figures and those shown in the Summary Compensation Table (SCT).
  • For equity-based compensation, companies would use the fair market value on date of vesting rather than estimated grant date fair market value as used in the SCT.
  • The proposed rules also would require the reporting and comparison of cumulative TSR for the last five fiscal years (with a description of the calculations).
  • The proposed rules would require a comparison of the company’s TSR against that of a selected peer group.
  • The proposed rules would require separate reporting for the CEO and the others NEOs – allowing use of an average figure for the other NEOs.
  • The proposed rules in an interactive data format – XBRL.
  • Compensation actually paid would not include the actuarial value of pension benefits not earned during the applicable year.
  • The proposed rules would phase in of the disclosure requirements. For example, in the first year for which the requirements are applicable (2018?), disclosure would be required for the last three years only.
  • The proposed rules exclude foreign private issuers and emerging growth companies, but not smaller reporting companies. However, the proposed rules would phase in the reporting requirements for smaller companies, require only three years of cumulative reporting, and would not require reporting amounts attributable to pensions or a comparison to peer group TSR.