Proposed Dodd-Frank Pay for Performance Rule Compares Long-Term Pay to TSR

Executive Pay Legislation and Regulation

This week, the SEC approved on a 3-2 party-line vote a proposed rule to implement the Dodd-Frank pay for performance disclosure which, problematically, would require companies to compare an additional total pay number based on the vesting date of equity awards to short-term total shareholder return, at least in some cases.  The proposed rule would implement the Dodd-Frank requirement that companies disclose the “relationship between executive compensation actually paid and the financial performance of the [company].” In defining “compensation actually paid,” the proposal modifies the total compensation number currently disclosed in the Summary Compensation Table by replacing the grant date estimate of equity awards with the value of restricted stock and performance shares, as well as the recalculated fair value of stock options as of the vesting date (such as by using the Black-Scholes method) and a modified pension value.  As discussed in the attached Center On Executive Compensation fact sheet, the proposed rule will require this new disclosure: A table in the proxy statement disclosing for each of the last five fiscal years: 

• “Compensation actually paid” for the CEO; 
• The average “compensation actually paid” for the other four named executive officers; 
• The total compensation figure from the Summary Compensation Table to compare the CEO and named executive offices pay;
• The company’s cumulative TSR for each year; and
• The TSR of either a peer group or industry index that is reported in the proxy for purposes of making incentive awards.

In addition to the table described above, companies will need to provide a description of the relationship between (1) executive compensation actually paid and the company’s TSR and (2) company TSR and peer group/index TSR over the company’s most recent five completed fiscal years.  This could be a narrative description, a chart/graph, or a combination. The disclosure, if finalized, could lead to confusion as it will compare stock compensation recognized over multi-year vesting periods with TSR over a standardized performance period   Even Chair Mary Jo White asked for comments on the proposal’s use of total shareholder return.  In voting against the proposal, Republican Commissioner Dan Gallagher indicated that the proposed rule is likely to create several unintended consequences, and companies “will need to make a number of supplemental disclosures to explain why the required disclosure seems to show a lack of alignment.”  He and fellow Republican Commissioner Michael Piwowar urged a more flexible, principles-based approach.  The Association’s Center On Executive Compensation will be submitting comments to the Commission expressing its concerns and suggestions for improvement.