SEC Reopens Comment Period on Executive Pay-Versus-Performance Rule

The U.S. Securities and Exchange Commission (SEC) reopened the comment period for a proposed executive pay rule first issued for comment in 2015 but never finalized. The proposal has been amended to include additional disclosures.

The proposed rule, Reopening of Comment Period for Pay Versus Performance, was published in the Federal Register on Feb. 2, with a 30-day comment period ending March 4, 2022.

Dodd-Frank Bill Provisions

The rule would implement provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that require publicly traded companies to disclose, in both tabular and narrative formats, how their executive compensation is paid in relation to their financial performance.

"In this reopening release, we are considering whether additional performance metrics would better reflect Congress's intention in the Dodd-Frank Act and would provide shareholders with information they need to evaluate a company's executive compensation policies," SEC Chair Gary Gensler said in a statement. "If adopted, this proposed rule would strengthen the transparency and quality of executive compensation disclosure."

The new disclosure rule requires companies to generate more-detailed reports, "which raises concerns as to increased reporting costs and decreased efficiency," explained Adam Finerman, a partner at law firm BakerHostetler in New York City, and Macy Munz, an associate in the firm's Houston office.

Bloomberg Law reported that "companies fear the SEC plan would cast their pay practices as out of step with true corporate performance, causing unwarranted attacks from shareholders during proxy voting," while the proposal's supporters "see it as an opportunity to modernize a crucial component of shareholder voting to better suit environmental, social, and governance (ESG) obligations."

Added Metrics

The original proposal would have required tabular disclosure in annual meeting proxy and information statements of:

• The "compensation actually paid"—the total compensation as reported in the Summary Compensation Table, with certain adjustments made for equity award and defined benefit and pension plan amounts—to the CEO and the average compensation actually paid to the other named executive officers as a group.
  

• The issuer's total shareholder return (TSR).
  

• Comparison with a peer group's TSR.

In the amended proposal, the SEC is considering including three additional measures of financial performance:

• Pretax net income.
  

• Post-tax net income.
  

• A company-selected measure.

"The SEC has specifically chosen pretax net income and [post-tax] net income as additional measures because they provide an accounting-based measure of financial performance, as well as being readily available," Finerman and Munz wrote. Also, "the SEC believes the company-selected measure will provide additional useful disclosure by permitting [SEC] registrants to select their most important performance measure, which would avoid the concern of whether a 'one size fits all' benchmark is appropriate for all companies."