Three Areas Stymie Pay-For-Performance Compliance

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By Yin Wilczek

July 9 — Companies will be waiting with bated breath to see whether the SEC modifies its pay-for-performance proposal in three key areas, consultants said July 9.

The Securities and Exchange Commission's proposal to focus on total shareholder return (TSR) as a performance measure, its definition of compensation “actually paid” and requiring comparison peer groups make the proposed rule extremely burdensome, said noted compensation expert Mark Borges, a principal at Compensia Inc.

“The challenges associated with complying” with the proposed requirements will “really turn on where the SEC comes down in these three particular areas,” Borges said.

Reverse Proxy Advisory Trend 

Amy Bilbija, managing director at Evercore Partners, also suggested that if the rule is finalized as proposed, the complexities it would introduce could drive institutional investors back into the arms of proxy advisory firms. It could lead to a reversal in investor trends where institutional investors return to heavily relying on advisory firms for say-on-pay recommendations “when in fact more and more institutions these days have been doing their own analysis,” she said.

Bilbija added that the proposal, if finalized, also could result in a dramatic increase in supplemental filings. Such filings “skyrocketed in the first year of say-on-pay,” she observed. Complex pay-for-performance disclosure also could lead to a sky rocketing of supplemental filings, which is not in “anybody's best interests.”

Borges and Bilbija spoke at an American Law Institute Continuing Legal Education webcast.

In late April, a divided SEC proposed a rule that would require companies to disclose executive compensation as compared to the company’s performance.

Disclosure Requirements 

The proposal, mandated by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, would require a company to disclose in its proxy statements the relationship between:

• the executive compensation actually paid to its named executive officers and its cumulative TSR; and

• the company's TSR and the TSR of a peer group the company chooses over each of its five most recently-completed fiscal years.


The comment period for the proposal ended July 6 and the SEC received about 65 comments, many of which honed in on and criticized the three areas highlighted by Borges and Bilbija.

The main problem with the proposal is that it would mandate something that companies already are doing voluntarily in their proxy statements in support of their say-on-pay proposals, Borges said. Many of the challenges the proposal raises “have to do with how to harmonize the mandatory requirements that the SEC is seeking to implement with the voluntary approach that many companies have developed on their own and refined over the last few years as part of their efforts to ensure that they obtain shareholder approval of their say-on-pay proposals.”


With regard to TSR, Borges noted that many companies don't use TSR as a performance measure. Another common complaint is that TSR frequently reflects marketplace changes that are independent of corporate performance, he said.

Bilbija added that even though proxy firms rely on TSR, they do so not because they believe it necessarily reflects performance, but because it is the only measure that spans across all of the companies that they target for say-on-pay recommendations. “It's just the one thing that works for their particular analysis,” she said.

In a recent report, ISS Corporate Solutions found that TSR is the top metric used for long-term performance awards overall. Fifty-eight percent of companies use TSR in 2015, compared to 51 percent in 2014, it said.

As to “actually paid,” Borges said that the SEC's proposed definition of the phrase, if finalized, will have a significant impact on how companies treat stock options. It would result in companies having to undertake burdensome “fair value” calculations using assumptions as of the vesting date, he said.

On peer groups, Borges said that one problem with the proposal is that it assumes that companies use the same compensation peer group year after year. Instead, most companies tend to revise and update their peer groups either annually or at least every two years, he said. “If the groups you are using for comparison purposes change every year, that complicates” how companies would explain the relationship between the numbers they use.

When Effective?

Borges suggested that there is a “reasonable likelihood” that the SEC will adopt the rule this year, which means the disclosure requirements may be in effect for the next proxy season.

“If I were a betting man, I would guess that the SEC is going to work diligently to get the rules finalized early in the fall with the aim of trying to have them in effect for the 2016 proxy season,” he said. However, he added that if the commission has not finalized the rule by late October, then the likelihood of it being in effect for 2016 “drops considerably.”

If the rule applies to the 2016 season, that would be very challenging for companies, Bilbija said.

“The proxy drafting calendar internally in corporate American has advanced significantly with the advent of say-on-pay, particularly in the” compensation discussion and analysis portion of the drafting, and “most companies start that much, much earlier than they used to,” she said. Finalizing pay-for-performance “very late in the year and forcing a pretty significant adaptation to mesh in some new disclosure in order to buttress your existing say-on-pay supporting documentation in your proxy statements is going to be tough for companies to comply with effectively.”

Borges noted that a month ago, he would have said that adoption of the rule this year was greater than 50 percent given what was then on the SEC's calendar. However, with the recent proposal on clawbacks and rumors that the commission will finalize pay ratios in August, perhaps pay-for-performance “will be a lower priority than what we thought a few weeks ago,” he said.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at