HR Policy Association in conjunction with the Center On Executive Compensation believe that executive compensation arrangements should be aligned with the best interests of a company’s shareholders by linking pay to results and ensuring that overall, pay arrangements support the business strategy. The Center believes that the U.S. Securities and Exchange Commission’s current executive compensation disclosure rules may lead to inaccurate perceptions of the link between pay and performance by requiring companies to report a total compensation number on the Summary Compensation Table that is a mix of actual pay received and the accounting estimate of equity compensation that may be received in the future, depending on the company’s and/or the executive’s future performance.
Although we acknowledge that investors find it helpful to review the pay granted by the board as an indication of the performance the board intended to reward, the Center believes that another useful lens is to evaluate what compensation resulted at the end of a performance period, along with the performance that generated it, and determine whether pay and performance were, in fact, aligned. This is often referred to as a realized pay disclosure, and an increasing number of companies have experimented with variations of it in the 2011 and 2012 proxy seasons.
We believe that improving the way in which companies show how pay is linked to performance will give shareholders better information about company pay programs and enable them to evaluate whether pay is in fact linked to performance, a key determination in making say on pay votes. This is best achieved by clarifying the relationship between pay actually earned in the reporting year and performance that produced such pay through a short proxy disclosure and straightforward description that compares these two measures. The Dodd-Frank Act mandated the SEC to make the pay-for-performance connection clearer, and the Center has recommended that the Commission strongly consider requiring or permitting a realized pay approach – one that compares realized pay to the performance that generated it.