Preparing to Disclose Pay for Performance

The Securities and Exchange Commission has proposed rules to implement the Dodd-Frank Act’s requirement that companies disclose how the pay of their top executives compares with the company’s performance, setting off another compliance effort for public companies.

Because of say-on-pay votes and proxy advisors’ assessments of companies’ compensation packages, many companies have started to provide a discussion of the relationship between executive pay and company performance in the proxy, according to Deborah Lifshey, a Managing Director at Pearl Meyer & Partners. “It’s not in any one specific format, but over the years this discussion has blossomed and it’s really quite good for most companies.”

The SEC’s proposal would “rein in” that discussion and Lifshey is concerned that the proposed disclosure rules are “one-size-fits-all” and will make it hard for companies to show “their true pay for performance theme.” 

Additionally, Lifshey notes the SEC’s use of total shareholder return in the pay for performance disclosure might lead some companies to switch to using TSR more heavily, or even exclusively, in their compensation programs, in place of other metrics. “We think TSR is an important measure and aligns short-term with returns to shareholders, but it shouldn’t be the only measure,” Lifshey said.

Pearl Meyer & Partners recommends that companies use “realizable pay”—which values equity grants at the end of the pay period, rather than the grant date—instead of the SEC’s “actual pay,” and show a three-year aggregate of all compensation along with a three-year cumulative total shareholder return, Lifshey said.

The firm has also suggested that companies be allowed to incorporate into the proposed table other metrics that they regard as important to their performance, and tag those numbers (in XBRL) just as they’re tagging total shareholder return, Lifshey said. “While you can still have the information in the supplemental disclosure, we think it can get lost there.”