Tag: Pay for performance


SEC Chair’s Statement on Pay Ratio

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement. Since it was mandated by Congress, the pay ratio rule has been controversial, spurring a contentious and, at times, heated dialogue. The Commission has received more than 287,400 comment letters, including over 1,500 unique letters, with some asserting the importance of the rule to shareholders as they consider the issue of appropriate CEO compensation and investment decisions, and others asserting that the rule has no benefits and will needlessly cause issuers to incur significant costs.

These differences in views were evident at the time the Commission voted to propose the pay ratio rule. That the Commission was even considering the rule proposal was, for example, criticized as contrary to our mission. We may hear similar thoughts today [August 5, 2015].

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The CEO Pay Ratio Rule

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [August 5, 2015], the Commission takes another step to fulfill its Congressional mandate to provide better disclosure for investors regarding executive compensation at public companies. As required by Section 953(b) of the Dodd-Frank Act, today’s rules would require a public company to disclose the ratio of the total compensation of its chief executive officer (“CEO”) to the median total compensation received by the rest of its employees. The hope, quite simply, is that this information will better equip shareholders to promote accountability for the executive compensation practices of the companies that they own.

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Dissenting Statement on Pay Ratio Disclosure

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at a recent open meeting of the SEC. The complete publication, including footnotes, is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

When the pay ratio disclosure rule was originally proposed, I objected to its consideration on the grounds that the Commission and its staff should not spend our limited resources on any rulemaking that unambiguously harms investors, negatively affects competition, promotes inefficiencies, and restricts capital formation—especially when there is no statutory deadline for completion. Pursuing a pay ratio rulemaking was wrong then and remains wrong now.

Today’s [August 5, 2015] rulemaking implements a provision of the highly partisan Dodd-Frank Act that pandered to politically-connected special interest groups and, independent of the Act, could not stand on its own merits. I am incredibly disappointed the Commission is stepping into that fray.

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Does the SEC’s New “Compensation Actually Paid” Help Shareholders?

Ira Kay is a Managing Partner and Blaine Martin is a Consultant at Pay Governance LLC. This post is based on a Pay Governance memorandum.

On April 29, 2015, the SEC released proposed rules on public company pay‐for‐performance disclosure mandated under the Dodd‐Frank Act. Pay Governance has analyzed the proposed rules and the implications for our clients’ proxy disclosures and pay‐for‐performance explanations to investors. We are concerned about the validity of describing a company’s pay‐for‐performance alignment using the disclosure mandated under the SEC’s proposed rules, and its implications for Say on Pay votes.

The disclosure of “compensation actually paid” (CAP) as defined by the SEC may prove helpful for investors and other outside parties to estimate the amount of compensation earned by executives, in contrast to the compensation opportunity as disclosed in the Summary Compensation Table (SCT). However, the SEC’s proposed rules are explicitly intended to compare executive compensation earned with company stock performance (TSR), per the relevant section of the Dodd‐Frank legislation. [1] If the rules are intended to help shareholders understand the linkage between executive compensation programs and stock performance, then the technical nuance of the proposed methodology may be problematic.

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Shareholder Activism and Executive Compensation

Jeremy L. Goldstein is founder of Jeremy L. Goldstein & Associates, LLC. This post is based on a publication by Mr. Goldstein. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

In today’s environment in which all public companies—no matter their size, industry, or performance—are potential targets of shareholder activists, companies should review their compensation programs with an eye toward making sure that the programs take into account the potential effects of the current wave of shareholder activism. In this regard, we have provided below some considerations for public company directors and management teams.

“Say on Pay”: Early Warning Sign

Low levels of support for a company’s “say on pay” vote can serve as an early warning sign for both companies and activists that shareholders may have mixed feelings about management’s performance or a board’s oversight. An activist attack following a failed vote may be particularly inopportune for target companies because a failed vote can result in tension between managements and boards. Moreover, activists will not hesitate to use pay as a wedge issue, even if there is nothing wrong with a company’s pay program. Companies should get ahead of potential activists by (1) understanding how their pay programs diverge from standards of shareholders and proxy advisors, (2) developing a robust, year-round program of shareholder engagement by management and independent directors, and (3) considering appropriate changes to pay and governance structures if advisable. Companies that are the most aggressive at shareholder outreach and develop the best relationships with both the investment and the governance representatives of their major holders will be best able to address an activist attack if it occurs.

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Latest CD&A Template Offers Best Practices, Is Win-Win for Issuers, Investors

Matt Orsagh is a director at CFA Institute.

To help companies produce a more clear and concise executive compensation report that attends to the needs of both companies and investors, CFA Institute has released an updated Compensation Discussion & Analysis (CD&A) Template. It is an update of the 2011 template of the same name and aims to help companies draft CD&As that serve as better communications tools, not simply as compliance documents.

CFA Institute worked with issuers, investors, proxy advisers, compensation consultants, legal experts and other associations to update the manual so it would best serve the needs of investors and issuers. One of the main enhancements in the latest version of the template is a graphic executive summary that presents the main information investors are looking for in a concise format that takes up only one or two pages.

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SEC Proposes “Pay Versus Performance” Rule

Edmond T. FitzGerald is partner and head of the Executive Compensation Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum; the complete publication, including Appendix, is available here. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

On April 29, 2015, a divided Securities and Exchange Commission proposed requiring U.S. public companies to disclose the relationship between executive compensation and the company’s financial performance. [1] The proposed “pay versus performance” rule, one of the last Dodd-Frank Act rulemaking responsibilities for the SEC, mandates that a company provide, in any proxy or information statement:

  • A new table, covering up to five years, that shows:
    • compensation “actually paid” to the CEO, and total compensation paid to the CEO as reported in the Summary Compensation Table;
    • average compensation “actually paid” to other named executive officers, and average compensation paid to such officers as reported in the Summary Compensation Table; and
    • cumulative total shareholder return (TSR) of the company and its peer group; and
  • Disclosure of the relationship between:
    • executive compensation “actually paid” and company TSR; and
    • company TSR and peer group TSR.

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Proposed Rule on Pay Versus Performance

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Stein’s recent public statement, available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

Executive compensation and its relationship to the performance of a company has been an important issue since the first proxy rules were promulgated by the Commission nearly 80 years ago. The first tabular disclosure of executive compensation appeared in 1943, and over the years, the Commission has continued to update and overhaul the presentation and content of compensation disclosures.

Today [April 29, 2015], the Commission, as directed by Congress, takes another important step in modernizing our executive compensation rules by proposing amendments on pay versus performance. [1] Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act directed the Commission to adopt rules requiring public companies to disclose in their proxy materials the relationship between executive compensation actually paid, and the financial performance of the company.

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SEC Releases Proposed Rules on Dodd-Frank Pay vs. Performance Disclosure Rule

Michael J. Segal is partner in the Executive Compensation and Benefits Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Segal, Andrea K. Wahlquist, and David E. Kahan.

On April 29, 2015, the SEC released proposed rules under Section 953(a) of the Dodd-Frank Act, regarding required proxy and other information statement disclosure of the relationship between executive compensation actually paid by a company, and the company’s financial performance. The proposed rules are subject to public comments for 60 days following their publication in the Federal Register. The new requirements could become effective as early as the 2016 proxy season.

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Improving Transparency for Executive Pay Practices

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. Related research from the Program on Corporate Governance about CEO pay includes: Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); Golden Parachutes and the Wealth of Shareholders by Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang (discussed on the Forum here); and The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

Today, as part of a series of Congressionally-mandated rules to promote corporate accountability, we consider proposed rules to put a spotlight on the relationship between executive compensation and a company’s financial performance. It is well known that the compensation of corporate executives has grown exponentially over the last several decades, and continues to do so today. It is also commonly accepted that much of that growth reflects the trend towards equity-based and other incentive compensation, which is thought to align the interests of corporate management with the company’s shareholders. Specifically, the idea is that stock options, restricted stock, and other incentive-based compensation encourages management to work hard to improve their company’s performance, because managers will share in the wealth along with shareholders when stock prices rise.

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