This week, the Center On Executive Compensation filed comprehensive comments with the SEC on its prescriptive rule on pay for performance, noting that "it fails to provide a clear picture of the pay for performance link," likely creating "confusion and misunderstanding among shareholders" and urging a principles-based approach instead. The Center's comments explain that by mandating that total shareholder return (TSR) be used as the only performance metric, the Commission's approach overemphasizes stock price over other financial performance measures that may be more effective at driving corporate performance and long-term shareholder value. In addition, by forcing companies to adhere to a standardized table, the proposed rule sacrifices accuracy for technical comparability, rather than giving investors a clear understanding of whether a company's specific pay program is aligned with performance. The Center's comments emphasize that companies will be forced to make substantial supplemental disclosures to counter misleading information in the table, further expanding disclosures that many investors already complain are too long. The Center's comments lay out a principles-based approach that would limit misleading information and duplicative disclosure by looking at how the elements of pay was linked to performance over the time periods they were outstanding. The Center's comments also make several technical recommendations in the event the Commission retains its prescribed approach, including:
- Adjusting compensation actually paid so that stock options are valued based on the spread between exercise price and the market price on the vesting date, which is consistent with the language in the release, rather than requiring the present value of future potential gains to be recalculated;
- Changing the comparison of “compensation actually paid” from the five-year cascading TSR to rolling three-year TSR to better align the time periods for pay and performance;
- Eliminating the comparison of company to peer group TSR, because the relationship is not necessarily related to performance;
- Eliminating the comparison to average named executive officer compensation, since investors are primarily focused on the CEO, and the average will fluctuate significantly; a
- Eliminating the Summary Compensation Table column, since that table is already provided in executive compensation disclosures.
