Companies Prepare to Change Pay-for-Performance Disclosures

Most plan to go beyond what SEC proposed rules require

By Stephen Miller, CEBS Jun 22, 2015
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One in three U.S. public companies expect to significantly change their approach to disclosing information on how they reward their executives in the wake of the Securities and Exchange Commission’s (SEC’s) proposed pay-for-performance disclosure rules, according to a poll by Towers Watson.

The poll of 453 corporate executives and compensation professionals, conducted in June 2015, also found that a majority of companies are likely to provide additional information and analysis that go beyond what the proposed rules will require.

In April 2015, the SEC issued proposed rules to implement the Dodd-Frank Act’s provisions that require companies to disclose the relationship between executive compensation actually paid and the company’s financial performance. The proposal would require company proxy statements to include a pay-versus-performance table and an explanation of the relationship between pay and performance.

According to the poll:

33 percent of respondents expect the pay-for-performance disclosure rule will fundamentally change their approach to executive pay disclosure.

More than half (55 percent) expect to do more than the minimum that would be required under the SEC proposal: 37 percent plan to disclose additional information and analyses to help tell their pay-for-performance story, while 18 percent will perform and may disclose additional pay-for-performance analyses.

Rethink Shareholder Communications

“With the SEC rules on the table, companies can carefully evaluate how they tell their pay-for-performance story to shareholders,” said Steve Kline, a director in Towers Watson’s Executive Compensation consulting group. “The fact that many companies expect to provide more information than the rules require is encouraging, although for many, the real challenge will be deciding the best way to present this information in their proxies.”

The poll also found that nearly half of the companies (46 percent) expect to make some changes to their proxy statement’s Compensation Discussion and Analysis (CD&A) section, while one in 10 view this as an opportunity to revamp their CD&A significantly.

Additionally, roughly half of respondents (51 percent) anticipate using the same peer group for their pay-versus-performance disclosure that they use for benchmarking their total compensation.

“While not surprising given the language of the Dodd-Frank requirement, the fact that the SEC proposal defines performance in this disclosure as total shareholder return (TSR) will put even more shareholder focus on this measure,” Kline said. “However, TSR is only a part of the pay-for-performance story. Companies will want to think carefully about the broader performance picture and how best to help shareholders understand how the pay programs support long-term value creation.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related SHRM Article:

SEC Proposes Pay-Versus-Performance Rule, SHRM Online Legal Issues, May 2015

Analyze Compensation Programs to Reveal Business Risks, SHRM Online Compensation, May 2012

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