The Securities and Exchange Commission (SEC) recently proposed rules that would require companies to disclose the relationship between executive compensation and the company’s financial performance. Today and tomorrow, we’ll look at what these rules mean for employers.
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“These proposed rules would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance,” says SEC Chair Mary Jo White. “The proposal would require enhanced disclosure that can be compared across companies.”
Both Individual and Peer Disclosures Required
The proposed rule would require a company to disclose executive pay and performance information for itself and companies in a peer group in a table, and to tag the information in an interactive data format.
All companies would be required to disclose the information for the last five fiscal years, except for smaller reporting companies, which would be required to provide disclosure for only the last three fiscal years. The proposed rules provide phase-in periods for these requirements.
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Highlights of the Proposed Rules
The proposed disclosure would be required in proxy or information statements in which executive compensation disclosure is required. The proposed rules would require companies to disclose, in a new table, the following information:
- Executive compensation actually paid for the principal executive officer, which would be the total compensation as disclosed in the summary compensation table already required in the proxy statement with adjustments to the amounts included for pensions and equity awards. The amount disclosed for the remaining named executive officers identified in the summary compensation table would be the average compensation actually paid to those executives.
- The total executive compensation reported in the summary compensation table for the principal executive officer and an average of the reported amounts for the remaining named executive officers.
- The company’s total shareholder return on an annual basis, using the definition of total shareholder return (TSR) included in Item 201(e) of Regulation S-K, which sets forth an existing requirement for a stock performance graph.
- The TSR on an annual basis of the companies in a peer group, using the peer group identified by the company in its stock performance graph or in its compensation discussion and analysis.
Smaller reporting companies—those required to disclose for only the last 3 fiscal years, as mentioned above—would not be required to present a peer group TSR because they are not required to disclose an Item 201(e) performance graph or a compensation discussion and analysis.
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Interactive Data Format Required
Companies would also be required to tag the disclosure in an interactive data format using eXtensible Business Reporting Language, or XBRL. This requirement would be phased-in for smaller reporting companies, so that they would not be required to comply with the tagging requirement until the third annual filing in which the pay-versus-performance disclosure is provided.
Using the information presented in the table, companies would be required to describe the relationship between the executive compensation actually paid and the company’s TSR, and the relationship between the company’s TSR and the TSR of its selected peer group. This disclosure could be described as a narrative, graphically, or a combination of the two.
Tomorrow, we’ll look at the executives and companies covered, as well as the transition period provided by the proposed rules.
Very interesting. Potential drawbacks?