Statement by Commissioner Crenshaw on Final Rule Regarding Pay Versus Performance

Caroline A. Crenshaw is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today the Commission adopted a rule that provides investors with information about how corporate executives are paid. That is, quite simply, it. This rule does not regulate the way companies incentivize their executives, but rather the disclosures that companies are required to make about such compensation. More specifically, Pay Versus Performance disclosures give investors insight into how performance measures impact executive compensation, in order to allow investors to better understand how boards pay their company executives.

Congress enacted Section 14(i) of the Exchange Act and other executive compensation reforms as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. [1] Those provisions, among other things, provide disclosure into an area that had inadequate transparency. The Global Financial Crisis of 2007-2008 put the lack of transparency into stark relief, as executives received multimillion-dollar pay packages for short-term gains that contributed to disastrous results. [2] After hearing testimony on the matter, the Senate Banking Committee issued a report that quoted an adage coined by Louis Brandeis, “sunlight is the best disinfectant.” [3]

Those words encapsulate a simple and powerful idea that governs much of our securities markets: transparency is cleansing and improves markets for both companies and investors. Transparency can be directed into areas of opaqueness as needed, it helps prevent fraud, and is a key feature of our markets, which have become the gold standard of capital markets across the globe. [4] Louis Brandeis published that famous adage in the early 20th century. [5] Yet, nearly a century later, the Senate Banking Committee found those words, and the driving principle behind them, pertinent and captured them on the legislative record in deliberating on and passing into law Dodd-Frank.

Our markets evolve and innovate, often quickly, however, even amidst change, the principle behind Brandeis’s words hold true and is evergreen. Different types and categories of disclosure become more important as our economy, financial markets, and market practices change and evolve. [6] Adjusting, calibrating, and adding those needed disclosures is one of the core functions of the SEC.

Today, we have finalized a rule aimed at achieving that transparency in regards to executive pay. [7] It was initially proposed in 2015, and in the intervening seven years since the proposal commenters have had the ability to carefully consider how executive pay and performance have evolved, and then comment on what information is useful to investors given the history and development of pay practices.

For example, in 2010, more pay was based solely on financial measures such as profitability, revenues, and measures of cash flow. [8] But, as several commenters noted, the underlying performance measures that are used to determine executive pay in today’s market for executive compensation encompass a broader mix—both quantitative and qualitative; financial and nonfinancial. [9] Further, roughly 70% of executive pay plans consider nonfinancial measures, and these can include employee engagement, customer service, and safety. [10] Investors and other stakeholders commented on this rule to assert that a complete picture of executive pay and performance would include disclosure of both financial and nonfinancial measures used by a registrant to pay executives. [11]

In response to comments and developments in market practice, the final Pay Versus Performance rule made a change from what was proposed to permit companies to include nonfinancial performance measures in a list of their three to seven “most important” measures [12] and also disclose such measures in a table as they see fit. [13] By contrast, financial measures are required to be disclosed if companies are linking pay and performance to them. It remains to be seen whether companies will make sufficient disclosures to investors through permissive inclusion of nonfinancial measures versus requiring disclosure on the same footing as financial measures. We will have to make that determination over time, as we see if there is adequate sunshine and visibility into executive compensation packages and the measures used in them. Today’s rule is an important first step that I am pleased to see the Commission take.

I would like to thank the staff in the Office of the Chief Accountant, Office of the General Counsel, the Division of Corporation Finance, the Division of Economic and Risk Analysis, and the Chair’s office for all of their work. I would also like to thank John Byrne and Jennifer Zepralka from the Division of Corporation Finance for their dedication, expertise, and engagement with my office on this rulemaking.


1Section 953(a) of Dodd-Frank added section 14(i) to the Exchange Act. See Pub. L. No. 111-203, 124 Stat. 1376 (2010).(go back)

2See, e.g. Protecting Shareholders and Enhancing Public Confidence by Improving Corporate Governance: Testimony before the Subcommittee on Securities, Insurance, and Investment of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111th Congress, 1st session, (2009) (Testimony of Ms. Ann Yeger) (“Failures of board oversight, of enterprise risk, and executive pay were clear contributors to this crisis. In particular, far too many board structured and approved executive pay programs that motivated excessive risk-taking and paid huge rewards…”); Jenny Anderson, Chiefs’ Pay Under Fire at Capitol, N.Y. Times (Mar. 8, 2008) (“The [House]hearing shed some light on how Wall Street’s compensation philosophy may have contributed to the mortgage boom. Corporate board and compensation committees agreed to lucrative plans that gave executives strong incentives to take big risks.”)(go back)

3See Report of the Senate Committee on Banking, Housing, and Urban Affairs, S. 3217, S. Rep. No. 111-176, at 135 (2010) (“As U.S. Supreme Court Justice Louis Brandeis noted, ‘sunlight is the best disinfectant.’ Transparency of executive pay enables shareowners to evaluate the performance of the compensation committee and board in setting executive pay, to assess pay-for-performance links and to optimize their role of overseeing executive compensation…”).(go back)

4Changing and evolving markets require modern and updated disclosures. See, e.g., Jay Clayton, Chairman, Sec. & Exch. Comm’n, Remarks to the Economic Club of New York (Sept. 9, 2019) (“Last month’s proposal to modernize core disclosure requirements also recognizes the significant changes that have taken place in our economy in the last thirty years, including that (i) firms vary widely—again, one size does not fit all—and (ii) intangible assets, and in particular human capital, often are a significant driver of long-term value in today’s global economy. In 1988, the largest 500 U.S. companies had a ratio of intangible assets to market capitalization of 8.5 percent—that ratio was 29.7 percent in 2018.”).(go back)

5See Louis D. Brandeis, Other People’s Money—Chapter V (1914). At the time of the quote, Louis Brandeis had not yet been appointed to the Supreme Court.(go back)

6See, e.g., supra note 5; Modernization of Regulation S-K Items 101, 103, and 105, 85 FR 63726 (Oct. 8, 2020).(go back)

7The SEC first proposed this rule in 2015. See Pay Versus Performance, 80 FR 26329 (July 6, 2015). The comment period was then re-opened six months ago to provide all interested parties and stakeholders additional opportunity to comment. See Reopening of Comment Period for Pay Versus Performance, 87 FR 5939 (Mar. 4, 2022).(go back)

8See, e.g., Pay Versus Performance, Release No. 34-[]at Section V.B.3 (adopted Aug. 24, 2022) [hereinafter “the Release”]; Davis Polk & Wardwell, Comment Letter on Pay Versus Performance (Mar. 4, 2022) (The increased prevalence of nonfinancial metrics (including environmental, social and governance (“ESG”)-related metrics and operational metrics, such as customer satisfaction) since the enactment of Dodd-Frank- in 2010 and the release of the 2015 Proposed Rules demonstrates that companies’ pay programs evolve over time, often in response to shareholder feedback.”).(go back)

9See, e.g., Council of Institutional Investors, Comment Letter on Pay Versus Performance (Feb. 24, 2022); Ceres Accelerator for Sustainable Capital Markets, Comment Letter on Pay Versus Performance (Mar. 4, 2022); Professor George Georgiev, Comment Letter on Pay Versus Performance (March 8, 2022).(go back)

10See Boris Groysberg, Sarah Abbott, Michael R. Marino, & Metin Aksoy, Compensation Packages That Actually Drive Performance, Harv. Bus. R. (Jan. – Feb. 2021) (“Seventy percent of the [the 250 largest S&P 500 firms studied by FW Cook]also use nonfinancial (both strategic and individual) metrics…”). This article goes on to note that 33% of companies with formulaic annual incentives incorporate a performance modifier that can adjust payouts up or down by anywhere from 5% to much more meaningful 25%; and that these modifiers are often based on nonfinancial metrics such as safety, customer service, and employee engagement. See id.(go back)

11See supra note 9.(go back)

12See Release at Section II.D.3.(go back)

13See Release at Section II.F. (“registrants will be permitted to include additional compensation and performance measures, or additional years of data, in the newly required table”).(go back)

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