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Concerns about the SEC’s final version of its pay-versus-performance rule have some compensation consultants warning that the regulator’s efforts to add clarity to assessing executives’ pay relative to company performance may complicate matters instead.
Companies must disclose total shareholder return (TSR), and provide the median TSR of companies in their peer group going back five years. Although the proposal allows companies to include other pay-for-performance scenarios beyond those measured by TSR, some consultants say the SEC’s emphasis on TSR will be a challenge for some companies.
“The challenge is making companies define their performance in terms of TSR regardless if it is a measure that is being used or not,” says Sharon Podstupka, a Principal in the New York office of Pearl Meyer. She notes that while investors and proxy advisory firms consider TSR to be a meaningful metric, many companies use performance metrics that focus on longer-term growth, such as earnings per share.
Podstupka also notes that performance measured by TSR tends to be more volatile, which can make explaining how pay and performance are linked more challenging in some years compared to others.