Regulators at the Securities and Exchange Commission want publicly traded companies to make it easier to determine that top executives’ compensations are aligned with the company’s financial performance.

By a 3-2 vote, the SEC Wednesday proposed “pay versus performance” requirements aimed at enabling investors to determine the actual compensation to chief executives, see whether the pay aligns with company performance and make comparisons with similar data from other companies.

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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.

These regulations will bring about some uniformity because companies currently have no standard system for reporting executive compensation, says Steve Kline, director in the executive compensation consulting group of Towers Watson. “Investors are throwing up hands not knowing how to deal with it.”
However, he adds, many companies already compare compensation with performance in their proxies. Critics are saying these new rules could cause some added financial regulatory burden on employers.

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“The bottom line is that its part of sweeping regulation that came about during the Great Recession,” Kline says, pointing to other proposed rules still floating around, including one calling for companies to disclose the ratio between the chief executive's compensation and the median total compensation for all other employees.

Kline says this proposal, for the most part, is asking companies to provide already shared information, just in a different way.

“There have been a lot of ways of attacking this beast,” he says, “and companies can still put their own spin, but there is now a threshold where you have to meet the compliance piece first.”

Voting against the proposal, SEC Commissioner Daniel Gallagher said there were other more “pressing, complex issues in the equities and fixed income markets that desperately need our attention. Instead of focusing our resources on those critical areas, we are taking another trudging step on the path towards completing Dodd-Frank’s — and thus the federal government’s — intrusions into the realm of corporate governance.”

The proposed rule will be subject to a 60-day comment period following publication in the Federal Register

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