In response to the SEC’s reopening of the comment period for the 2015 Dodd-Frank Pay for Performance proposal, HR Policy’s Center On Executive Compensation again urged the Commission to substantially revise the proposal and demonstrated why it should not adopt inflexible, prescriptive, one-size fits all performance metrics in a newly mandated table.
Building on the Center’s substantial initial comments in 2015, we advocated to the Commission that:
- The mandated pay for performance table required by the rule is unworkable and should be scrapped. Instead, the SEC should adopt a principles-based rule that allows companies to effectively explain the relationship between pay and performance.
- Requiring the disclosure of prescriptive financial performance metrics (i.e., pre-tax net income and net income) is ineffective because a Center analysis shows there is no single metric or group of metrics that accurately reflects value creation for all companies.
- The 2015 Proposal’s definition of “compensation actually paid” does not accurately reflect that term. The Center believes the Commission should fundamentally rethink that definition, particularly as it relates to stock options and pension values.
It is not clear that investors need or want the standardized, tabular disclosure contained in the 2015 proposal, or how such information would enhance investors’ understanding about the link between corporate pay and performance. This is particularly the case given the prevalence of pay for performance disclosure and the extensive resources available to investors to determine performance.
Ultimately, the Center cautioned the Commission that if a rule like the 2015 proposal is finalized, it would create more confusion than clarity for investors.
Outlook: Given the timing of the SEC Reopening Proposal, the expanded pay versus performance disclosure requirement will not likely be in effect for the 2022 proxy season, at least for calendar year companies. However, the expanded disclosures, particularly with respect to company-specific performance measures, should be considered by public companies and their compensation committees now in anticipation of the SEC adopting a final rule.