On April 29, 2015, the Securities and Exchange Commission (the “SEC”) released proposed rules requiring U.S. public companies to disclose the relationship between executive compensation actually paid by the company and the company’s financial performance (the “Proposed Rules”). The Proposed Rules, which implement Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act by adding a new Item 402(v) to Regulation S-K, would provide greater transparency and allow shareholders to be better informed when they vote to elect directors or vote on executive compensation.
The Proposed Rules would require the disclosure of information in any proxy or information statement in which executive compensation disclosure is required regarding (i) the relationship between compensation actually paid to a company’s named executive officers and the cumulative total shareholder return (“TSR”) of the company, and (ii) the relationship between the company’s TSR and the TSR of a peer group chosen by the company, over each of the company’s five most recently completed fiscal years (to be phased in beginning with three years of data). Smaller reporting companies would be exempt from peer group comparisons and would only be required to provide three years of data (to be phased in beginning with two years of data). As proposed, the proxy or information statement must also include a table containing the values of (i) compensation actually paid to the CEO and total compensation paid to the CEO as reported in the Summary Compensation Table, (ii) average compensation actually paid to other named executive officers and average compensation paid to these other named executive officers as reported in the Summary Compensation Table, and (iii) cumulative TSR of the company and its peer group.
The Proposed Rules would not apply to foreign private issuers and registered investment companies. The Proposed Rules also provide certain accommodations for smaller reporting companies, including emerging growth companies. Companies would need to include the proposed disclosure in the first applicable filing after the Proposed Rules become effective. The Proposed Rules are subject to a 60-day comment period, but could become effective as early as 2016. A number of comments have already been received, which include both support and criticism of the new disclosure requirements under the Proposed Rules. Certain comments focus on whether TSR is a sufficient measure for pay-versus-performance and whether the final rules should permit companies flexibility to use metrics other than TSR to measure company performance. A number of comments highlight the new burdens which would be added to the proxy process for public companies if the rules are adopted as proposed.
Given the potential burdens associated with the additional disclosures that would be required under the Proposed Rules, companies should consider planning and preparing for compliance now, in advance of the rules becoming effective, including:
- determining which parties within and outside of the organization would be responsible for gathering the information and material required to be reported;
- considering how their cumulative TSR compares to compensation actually paid to the CEO and other named executive officers and to the TSR of peer group members; and
- considering the extent to which narrative, supplemental or other additional disclosures may be necessary to help describe the relationship between pay-versus-performance, and addressing any actual or perceived discrepancies arising from comparisons with peer group members.