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.

Nonetheless, we’ve now seen too many instances where managers have received outsized compensation even when companies experience large losses and shareholders suffered. Indeed, one 2013 study found that of the 25 highest-paid CEOs for each year in a twenty-year period ending in 2012, 38% were held by CEOs who led firms that were bailed out or crashed during the 2008 financial crisis, were fired by their firms, or had to pay settlements or fines related to fraud charges. Other studies have found a significant disconnect between the financial performance of companies in the S&P 1500 and the incentive compensation of their executives. In fact, a recent study found that in a three-year period after the 2008 financial crisis, while overall stock-based performance declined for companies in the S&P 1500, total CEO compensation during this same period increased.

Today’s proposed rules, as required by Section 953(a) of the Dodd-Frank Act, are designed to shed light on the relationship between executive pay and company performance by providing shareholders with additional information to enable them to better determine whether their companies are appropriately and responsibly setting executive pay. These rules attempt to fulfill this goal by requiring companies to provide shareholders with a clear description of the relationship between compensation actually paid to the companies’ senior officers—the so-called “named executive officers”—and the financial performance of the issuers.

Although the Commission’s current disclosure rules already require certain summary executive compensation information to be disclosed to shareholders, today’s proposal will supplement this disclosure by providing for executive compensation information to be calculated and presented in different ways—so as to highlight the relationship between a company’s executive compensation practices and its financial performance. More specifically, the proposed rules will require that registrants present in a proxy or information statement a table that includes, for each of the company’s last five years, the following:

  • First, the executive compensation actually paid to the company’s principal executive officer and separately, as an average, the compensation paid to the other named executive officers;
  • Second, the financial performance of the company and, in addition, either a recognizable industry or line-of-business index and/or an identified peer group, calculated by using cumulative total shareholder return; and
  • Third, for comparison purposes, the summary compensation data that is already disclosed under current rules for the principal executive officer and the other named executive officers.

In addition, the proposed rules require registrants to provide a clear description of the relationship between the executive compensation actually paid and the financial performance of the company. However, registrants are provided flexibility to choose how best to present this relationship, such as in a narrative form, a graphic form, or both.

Today’s rules also take an important step forward in furthering the usability and comparability of executive compensation disclosures by requiring that “pay versus performance” information be provided in an interactive data format using XBRL. This is a new development in the corporate governance context that has long been discussed. Indeed, in its 2010 Concept Release on the U.S. Proxy System, the Commission stated that if issuers provided reportable items in interactive data format, “shareholders may be able to more easily obtain specific information about issuers, compare information across different issuers, and observe how issuer-specific information changes over time as the same issuer continues to file in an interactive data format.” More recently, in 2013, the Commission’s Investor Advisory Committee recommended that the Commission prioritize tagging of data that would provide increased transparency with respect to corporate governance issues, including portions of the proxy statement that relate to executive compensation. Although data tagging is already required in other contexts, today’s proposed rules would, for the first time, implement an interactive data format into a Commission rulemaking involving the proxy process and corporate governance.

It is important to note what today’s proposed rules do not do: they do not attempt to direct or otherwise define what an executive should earn. That is left to a company’s board of directors and senior management. Instead, today’s proposed rules focus on providing increased transparency on the linkage between executive compensation and the company’s performance.

Today’s pay versus performance proposed rules go to the heart of good corporate governance. Indeed, one of the principal elements of effective corporate governance is accountability. Accountability means that actions have consequences, and good corporate governance demands that boards and company management be held accountable for the decisions they make. A company’s executive compensation practices can demonstrate whether senior management will be held accountable for their performance. When it comes to executive pay, shareholders benefit when good performance is rewarded, and when poor performance is not.

Good corporate governance also reminds a company’s directors that they do not answer to management, but rather work for the true owners of the public corporation—the company’s shareholders. To that end, the disclosure proposed today can better inform shareholders and give them information needed to hold directors accountable for the executive compensation decisions that they make. In this context, company boards must be vigilant in ensuring that corporate pay practices adequately reflect the performance of their executives.

Many boards have already adopted strong corporate governance measures and do a good job in representing the interests of shareholders. Others can do better—much better. For those boards in particular, the public disclosure of “pay versus performance” information should serve to dissuade them from being complacent and simply rubberstamping the salaries of their executives. This concept of motivating boards to action is critical to good corporate governance, because when boards allow themselves to be dictated to by management, the harm to shareholders can be devastating.

Ultimately, this proposing release is a positive step in the direction of better corporate governance—through increased transparency and greater accountability—and is a step forward in ensuring that a company’s management and directors are acting in the best interests of shareholders.


In conclusion, I will support today’s rules as proposed. As with all proposing releases, this proposing release includes many requests for comment regarding the approach that the Commission has decided to take to implement the statutory mandate. Public comments are an important part of the rulemaking process, and I especially encourage investors to review and submit their thoughts on the proposed release.

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