Proposed SEC Rule to Require Companies to Disclose Relationship Between Executive Pay and Company's Financial Performance

The Securities and Exchange Commission (“SEC”) has proposed a new rule that would require publicly held companies to report on the relationship between executive pay and company financial performance. The proposed rule implements Section 953(a) of the Dodd-Frank Act to provide greater transparency and better inform shareholders voting on executive compensation.

The proposed “pay vs. performance” rule would be required in the proxy or information statements of publicly held companies wherever the disclosure of executive compensation is mandated. The disclosure would be in the form of a new table covering the last five fiscal years (three years for smaller reporting companies) with information that includes:

  • The CEO’s paid compensation with adjustments for pensions and equity awards and an average of the compensation paid for other company executives.
  • The total executive compensation paid to the CEO and an average of the reported compensation paid for other company executives.
  • Total shareholder return (“TSR”) on an annual basis, using the definition of TSR from Item 201(e) of Regulation S-K.
  • Annual TSR of peer group companies, as identified by the company in its stock performance graph or compensation discussion. (Smaller reporting companies are exempt from this requirement.)

Using the data provided in the table, reporting companies would be required to describe the relationship between the executive compensation paid and the company’s TSR as well as the relationship between the company’s TSR and the TSR of its peer group.

The proposed rules apply to all reporting companies except those that are exempt from the statutory requirement, including registered investment companies, foreign private issuers and emerging growth companies.

If adopted by the Commission, the proposed rules will be published in the Federal Register and will be open for comment for 60 days following the publication.

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