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Long-dormant pay vs. performance regulation is adopted by the SEC

The Dodd-Frank Act's pay vs. performance rule was finally adopted by the Securities and Exchange Commission (SEC) on Thursday after languishing on the back burner for years.

For the first time since a first comment period in 2015, the SEC reopened the rule's comment period in January. As soon as he took office, Gary Gensler, the agency's chair, vowed to see through the parts of Dodd-Frank that had not yet been put into effect. Dodd-Frank was enacted in 2010 as a response to the 2008 financial crisis.

The pay versus. performance regulation mandates that publicly traded corporations disclose data illustrating the link between executive salary actually paid and the financial performance of the company. In line with Item 402 of Regulation S-K, the details must be provided for the registrant's five most recent fiscal years (three years for smaller reporting companies).

The rule will go into effect 30 days after it is published in the Federal Register, with a compliance deadline of December 16, 2022 for fiscal years for fiscal years ending on or after that date and requiring executive compensation disclosures in proxy and information statements. In the first proxy or information statement in which they make the disclosure, registrants other than smaller reporting firms are expected to include information for three years; smaller reporting businesses are only required to offer information for two years. Subsequent yearly proxy filings will be needed to include additional years.

A table defining the following financial measures must include the information for chief executive officers and other named executives: 

- Total shareholder return (TSR);

- TSR of companies in the registrant’s peer group;

- Net income; and

- A financial performance measure chosen by the registrant.

The SEC stated in a press release that registrants will be required to explain the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant's TSR and the TSR of its chosen peer group, using the information presented in the table. "A registrant will also be required to provide a list of three to seven financial performance measures that it determines are its most important performance measures for linking executive compensation actually paid to company performance."

The original proposal required businesses to identify and score five financial performance measures; the final rule now includes flexibility.

Given the "minimal new information" disclosures will need, the SEC decided that overall compliance costs with the final rule should be low.

Commissioner Hester Peirce objected to this point.

According to Peirce, who dissented from the rules, "the primary benefit of the rulemaking is in the new presentation of information that generally is already disclosed elsewhere and the comparability the commission hopes the tabular presentation will produce. But, the fundamental variation across companies’ compensation practices and the underlying assumptions some of the disclosures necessitate will render the new presentation anything but clear and comparable." 

Additionally, Commissioner Mark Uyeda expressed his displeasure that the regulation, which was re-proposed in January, before he joined the agency, was not updated with economic analysis and more current data.

"Rather than taking the more appropriate route of reproposing the pay versus performance rule with updated data and analysis, the commission bypassed having an effective notice-and-comment process as required by the Administrative Procedure Act in favor of a procedural shortcut," he added.

Each commissioner agreed that it was necessary to carry out congressional demands, but they questioned the rule's effectiveness given how far from its initial goals it had strayed.

The Democratic majority at the SEC characterized the rule's passage as a victory for investors looking to evaluate how a public firm makes decisions about its executive compensation policy.

In a statement, Gensler said, "I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies  That serves investors and our markets."


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