In an era where TikTok stars outearn scores of CEOs of top earning publicly traded companies, executive compensation is no less important to the investing public or to companies striving to attract and retain top talent. Indeed, just this year the CEO of Starbucks received a 39% pay increase. Such soaring executive compensation has not escaped the notice of the SEC.
On January 27, the SEC once again raised the prospect of a "pay versus performance" rule. The rule, which was first proposed back in 2015 as required by Section 953(a) of the 2010 Dodd-Frank financial reform, would require public companies to report various executive compensation metrics for executive officers, including their CEO, in their proxy statements. Though the rule never came to fruition in 2015, it has been reopened for comment in connection with "certain developments since 2015 when the proposing release was issued," including "developments in executive compensation practices."
The resurfacing of the rule accompanies complaints by investor advocates of mismatches between company performance and executive compensation. Proponents of the re-proposed rule hope it will facilitate more straightforward peer-to-peer comparison of compensation practices at public companies. On the other hand, opponents worry the rule could confuse investors and unnecessarily complicate disclosures.
To calculate executive compensation under the rule, companies would report in their proxy statements the amount "actually paid" to their executives. This amount would include equity awards when they are vested, as opposed to when they are granted. Further, it would exclude any changes in the present value of benefits from defined benefit and pension plans. The rule, as currently proposed, would also require companies to include charts in their proxy statements that compare executive compensation with total shareholder return, a metric that the SEC has lauded as consistently calculated, objectively determinable, and already required in securities filings.
The SEC's supplemental release for this rule, however, expands the 2015 version of the rule's disclosures to include three additional financial metrics and a separate chart listing key incentive plan metrics that drive compensation outcomes. To that end, the SEC is seeking comment on other performance and compensation metrics that should be utilized in these disclosures - including those linked to companies' ESG-related goals. Indeed, in connection with the reopening of comment on the rule, Commissioner Crenshaw stated that the SEC was "encourag[ing] commenters to provide insight into how ESG measures are utilized in executive pay packages" in order to "let the Commission know whether there is sufficient insight into the methodologies behind the measures on which ESG compensation targets are based." The SEC is also requesting comment on whether smaller reporting companies, or SRCs, should be required to provide this information in their proxy statements.
The rule will be open to comments from the public for 30 days of its publishing in the Federal Register. In the meantime, publicly traded companies should consider preparing for the potential of heightened disclosure around executive compensation, as well as evaluating how they use performance on ESG-related achievements to set executive compensation levels.
Pay Versus Performance Takes Center Stage
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