Performance And Pay

A new SECseeks to align CEO and close collaborators’ compensation with corporate results.

The US Securities and Exchange Commission (SEC) now requires that public companies disclose how their top management’s pay is tied to corporate performance. The long-awaited rule takes effect on October 11.

It was initially a provision included in the 2010 Dodd-Frank Act on Wall Street reform. Plus, demanding investors increasingly ask for clear explanations about signing bonuses, retention bonuses or equity awards.

The rule seeks to align CEO and close collaborators’ compensation with corporate results. Large companies must provide a five-year history of pay versus performance metrics, while smaller companies will show three years of data. The list includes net income, total shareholder return (TSR) and similar company TSRs to compare compensations. The SEC expects a description of the relationship between each performance measure vis-à-vis CEO pay. An average estimate suffices for the other executives, such as the CFO.

Companies must emphasize three to seven important factors determining the compensation, explaining how they are calculated and how they impact the pay.

SEC Chairman Gary Gensler hopes that investors will appreciate the change because it will be “easier for shareholders to assess” the compensation policies. Commissioner Hester Peirce, a Republican appointee to the SEC, instead underlines the heavy cost of implementation, especially for smaller companies.

Brian Soares and Celia Soehner from law firm Morgan Lewis note in their blog that the new rule “does not require disclosure of ESG metrics,” however, nonfinancial environmental, social and governance (ESG) measures could be discussed. Many companies, such as McDonald’s, are already tying ESG to pay. The group links 15% of bonuses to diversity goals.

The transparency effort will certainly reassure shareholders who are increasingly asking for an alignment between pay and performance. Disgruntled investors are even suing when they spot an outsize CEO award. For example, the head of Mullen Automotive, an electric-vehicle manufacturer, got stock grants that could reward him with $216 million, and investors are in revolt. Would the new rule prevent such excess?