SEC adopts pay-versus-performance disclosure rules

By Grace Noto for CFODive.com

• Public companies will need to disclose further details regarding how top executives are paid and the companies’ financial performance, according to a new regulation adopted by the Securities and Exchange Commission announced Thursday.

• Under the long-delayed rule, U.S. public companies are required to include a table within their filings that covers executive compensation and financial performance indicators for a five-year period.

• “I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies,” SEC Chair Gary Gensler said in a written statement. “That serves investors and our markets.”

The SEC’s amendment implements a provision mandated under the 2010 Dodd-Frank Act, per the Aug. 25 release, aimed at increasing transparency for investors surrounding executive pay practices as well as to halt financial fraud.

The financial performance measures, which will be included in the table required by the SEC, include companies’ total shareholder return (TSR), TSR for the companies’ peer group, and net income, according to the agency.

The table will also include a “company-selected measure” that in the assessment of the company, “represents the most important financial performance measure the registrant uses to link compensation” paid to the company’s named executive officers (NEOs) to company performance, the SEC outlined.

“I am pleased that the final rule provides for new, more flexible disclosures that allow companies to describe the performance measures it deems most important when determining what it pays executives,” Gensler said in a written statement.

The commission first proposed the pay versus performance disclosure requirements in 2015 under then-Chair Mary Jo White, with a close 3-2 vote approving the proposal, but the rules were never finalized. The SEC reopened the comment period for the requirements in January under the leadership of Gensler, who assumed office in April 2021.

The final rule passed narrowly with another 3-2 vote in favor, with Republican Commissioner Hester M. Peirce arguing the rule will “elicit costly, complicated disclosure of questionable utility” in a statement outlining her inability to support the final regulation.

Fellow Republican Commissioner Mark T. Uyeda noted the SEC had failed to update economic analysis when considering the rule, writing that the public “in providing new comments on the rule, could only respond to a seven-year old economic analysis” in a statement about the ruling.  

The new rules will come into effect 30 days following their publication in the Federal Register, according to the SEC.