SEC Proposes Pay v. Performance Rule, Uses Total Shareholder Return as Key Metric

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By Rob Tricchinelli

April 29 — The Securities and Exchange Commission proposed a rule by a 3-2 vote April 29 that would require companies to disclose executive compensation as compared to the company’s performance.

The “pay versus performance” proposal, authorized by Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, would mandate that a company disclose in proxy and other information statements its top executive’s actual pay, average actual pay for other named executives and “total shareholder return” on an annual basis.

The companies would also have to disclose the total shareholder return for peer companies, which they determine. The companies would have to describe the relationship between pay and performance, as well as between their own performance and that of their peer group.

Commissioners Daniel Gallagher and Michael Piwowar voted against the proposal. Once the proposed rule is published in the Federal Register, members of the public will have 60 days to comment.


The disclosures under the proposal would have to look back five years.

Smaller reporting companies would only have to report for the three most recent years and would not have to provide the peer group information.

Foreign private issuers, registered investment companies and emerging growth companies would not be subject to the disclosure requirement at all.

Commissioner Split

“Having a description of how the executive compensation actually paid relates to the financial performance of the company can assist shareholders in assessing a company’s executive compensation practices and policies,” SEC Chairman Mary Jo White said at the meeting.

White said she wants further comment on whether total shareholder return is “the optimal measure of financial performance” and how useful the information would be to shareholders.

Gallagher and Piwowar, both Republicans, called the proposal a dubious use of the agency’s resources.

Agency Resources

“There are pressing, complex issues in the equities and fixed income markets that desperately need our attention,” Gallagher said during the meeting. “Instead of focusing our resources on those critical areas, we are taking another trudging step on the path towards completing Dodd-Frank’s, and thus the federal government’s, intrusions into the realm of corporate governance.”

The SEC could also propose rules this year, under a neighboring section of Dodd-Frank, to require companies to disclose the ratio of their chief executive's pay to the employee average.

“I’ve always thought that this was one of the simpler components” of Dodd-Frank, Mary Mullany, a partner and head of the securities group at Ballard Spahr LLP in Philadelphia, told Bloomberg BNA. “I wondered why it took so long to get to this one.”

Actual Pay

In calculating actual pay, the companies would have to use the “actual compensation” figure from their proxy statements but adjust for pension and equity awards.

Specifically, the figure would not include changes in value of an executive's pension or stock that hasn't vested.

Unvested stock would count toward actual pay once it vests.


The proposal defines total shareholder return as it appears in Item 201(e) of Regulation S-K under the 1933 Securities Act.

“This simple presentation should make it easier for shareholders to understand the relationship between executive pay and company performance,” Commissioner Kara Stein said.

Many companies already calculate total shareholder return as a way to measure their performance.

“All this is prescriptive,” Andrew Liazos, a partner and leader of the executive compensation group at McDermott Will & Emery LLP in Boston, told Bloomberg BNA. “Certainly one could envision it being more onerous than it is.”

Commissioner Daniel Gallagher warned, however, that companies could game the system with “any of the usual corporate strategies for boosting stock prices in the short term,” such as cutting research and development, to make it appear that pay is in line with performance.


The proposal would also require the disclosures to be in eXtensible Business Reporting Language.

“The XBRL component to this could be one of the things that has unanticipated results,” Liazos said. “This is the first time it’s been done for proxy information.”

“I think it is a first step” toward the SEC requiring other disclosures in the format, Mullany said.

To contact the reporter on this story: Rob Tricchinelli in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

For the proposal, visit


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