After five years of anticipation from investors, issuers and other interested parties, today the U.S. Securities Exchange Commission released a statement outlining a proposed rule requiring public companies to disclose in its proxy statements the relationship between compensation paid and financial performance achieved. Perhaps the most notable feature of the proposed disclosure requirements is the introduction of data on “compensation ‘actually paid’ to certain executive officers” to supplement figures provided in the Summary Compensation Table. As proposed, financial performance would be measured based on total shareholder return and peer group total shareholder return. While many companies have started including such information in its proxy statements in recent years, the proposed rule would provide a standardized format for comparison across companies going forward.
An excerpt from the SEC’s statement is provided below:
The Senate Report that accompanies Section 953(a) of the statute noted: “It has become apparent that a significant concern of shareholders is the relationship between executive pay and the company’s financial performance…The Committee believes that these disclosures will add to corporate responsibility as firms will have to more clearly disclose and explain executive pay.”
In order “to more clearly disclose and explain executive pay” in this context, the Commission is proposing to use a standardized, machine readable table. This table includes, in one location, easy to understand data regarding the last five years of a company’s financial performance. Financial performance data would be presented directly next to the data detailing the compensation of the company’s executive officers during the last five years.
This simple presentation should make it easier for shareholders to understand the relationship between executive pay and company performance. In addition to providing data on compensation “actually paid” to certain executive officers, the proposed table requires registered companies to include the Summary Compensation Table figures for certain executive officers. Including these numbers in the pay versus performance table is vitally important. It would allow shareholders to view a measure of pay that excludes changes in the value of equity grant awards. Providing two measures of compensation in the table may facilitate meaningful comparison, especially in situations where the “actually paid” figure may be misleading or not reflective of the true compensation package awarded to an executive in a given year.
The SEC’s public statement can be found here: http://www.sec.gov/news/statement/stein-statement-on-proposed-pay-for-performance.html