19 May SEC Proposes Disclosure on Executive Pay vs. Performance

The SEC released proposed rules required by the Dodd-Frank Act a few weeks ago. The proposal, if adopted, would require public companies to compare senior executives’ compensation with the actual performance of the company, measured by a shareholder return metric. “Emerging growth companies” (EGCs) will be exempt, and smaller reporting companies (many of which are also EGCs and therefore exempt) will have a lesser disclosure requirement. The disclosure would only have to be made in a proxy or information statement, not in regular periodic reports like 10-Ks and 10-Qs. This new information will have to be filed in XBRL format, the only non-financial information that would have to be reported this way.

These rules add to the “say on pay” rules passed by the SEC on its own a few years ago. Those rules require a non-binding vote on executive compensation. It is clearly part of a trend in the regulatory environment seeking to enhance accountability for the structure and amount of compensation paid to senior executives. There has been a concern among some that compensation packages have continued to grow even during times of market pullback or turmoil.

My thoughts? The US seems to be the one industrialized nation where the relationship between the lowest and highest paid employees is so large. Proponents say this is the free market, and top talent is expensive and requires these arrangements, often including big payouts when terminated. And that shareholders can vote with their feet and sell their stock if they disagree. Opponents believe the system is broken, boards are ineffective rubber stamps and even more regulation limiting compensation is appropriate. I think these laws and rules strike a reasonable balance allowing companies to do what they feel is necessary so long as the deals are fully disclosed and even subject to an advisory vote.