A Closer Look at Executive Compensation

moneyThe U.S. Securities and Exchange Commission wants the link between executive pay and a company’s financial performance to be clearer.

The SEC hopes it took a step in that direction this week, when it proposed rules that would implement a requirement mandated by the Dodd-Frank Act, obliging companies to disclose that relationship.

According to an SEC statement announcing the proposal, the rules “would provide greater transparency and allow shareholders to be better informed when they vote to elect directors and in connection with advisory votes on executive compensation.”

Firms would be obligated to disclose executive pay and performance information in a table, for themselves as well as a “peer group” of companies, and tag the information in an interactive data format. The table would include data such as:

  • 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 total executive compensation reported in the summary compensation table for the principle 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.

On the heels of the SEC announcement, National Public Radio’s Jim Zarroli summed up the proposal more succinctly.

“The rule grew out of the 2010 Dodd-Frank financial overhaul bill,” said Zarroli, a business reporter with NPR. “And it simply says that companies have to disclose whether executive pay is in line with their financial performance.”

This information “is already available for people who want to pore through financial reports,” he added. “The new law would simply require companies to put it in a form that’s easier for shareholders to digest.”

Zarroli called the rule “the latest attempt by regulators to address soaring corporate pay,” but also noted some compensation consultants’ skepticism toward the proposal, and said it’s unclear what if any bearing the law would have if approved.

SEC Chairwoman Mary Jo White, meanwhile, seems optimistic about the rule’s potential impact.

“These proposed rules would better inform shareholders,” said White, in the aforementioned statement, “and give them a new metric for assessing a company’s executive compensation relative to its financial performance.”