On April 29, 2015, the Securities and Exchange Commission (the SEC) voted 3 to 2 to issue a proposed rule on pay-versus-performance disclosure as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The proposed rule seeks to provide investors with standardized information that can be compared across companies while preserving companies’ flexibility to tell their own stories regarding the relationship between executive compensation and company performance. Given the ease of computing the required disclosure, if the comment process and rule adoption move forward smoothly, pay-versus- performance disclosure may begin to be phased-in for the next proxy season.
Under the proposed rule, registrants filing proxy and information statements bearing executive compensation disclosure must include a table with the following information covering the previous five fiscal years: (1) total compensation “actually paid” to the CEO or other principal executive officer, derived by modifying the total for such officer in the current summary compensation table, (2) an average of the total compensation actually paid to the other named executive officers (NEOs), (3) total shareholder return (TSR) of the company, and (4) TSR for the company’s self-determined peer group. The new table would also include amounts from the summary compensation table, for comparison purposes.
In addition to the tabular disclosure, companies would be required to describe the relationship between pay and performance using the data points in the new table. Companies would have broad flexibility to determine the format for describing the relationship (as a narrative, graphically or both) as well as what additional measures or data points to include in the description.
Companies should consider pay-versus-performance disclosure together with the existing disclosure requirements and the proposed CEO pay ratio disclosure when drafting their say-on-pay message. While the basic information required for the new disclosure should be fairly easy to compile based on information required for current disclosure, the hard work will be in communicating a company’s complex pay-versus-performance story in the face of the simplistic TSR data point. We may see companies elect to incorporate into their disclosure some of the more complex models proxy advisors are already using to evaluate pay for performance. Moving forward, companies should keep tabs on the proposed rule, which will now be subject to a 60-day comment period ending July 6, 2015, for its impact on executive compensation disclosure.