Does the SEC’s New “Compensation Actually Paid” Help Shareholders?

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2015-07-02

Editor's Note:

Ira Kay is a Managing Partner and Blaine Martin is a Consultant at Pay Governance LLC. This post is based on a Pay Governance memorandum.

On April 29, 2015, the SEC released proposed rules on public company pay‐for‐performance disclosure mandated under the Dodd‐Frank Act. Pay Governance has analyzed the proposed rules and the implications for our clients’ proxy disclosures and pay‐for‐performance explanations to investors. We are concerned about the validity of describing a company’s pay‐for‐performance alignment using the disclosure mandated under the SEC’s proposed rules, and its implications for Say on Pay votes.

The disclosure of “compensation actually paid” (CAP) as defined by the SEC may prove helpful for investors and other outside parties to estimate the amount of compensation earned by executives, in contrast to the compensation opportunity as disclosed in the Summary Compensation Table (SCT). However, the SEC’s proposed rules are explicitly intended to compare executive compensation earned with company stock performance (TSR), per the relevant section of the Dodd‐Frank legislation. [1] If the rules are intended to help shareholders understand the linkage between executive compensation programs and stock performance, then the technical nuance of the proposed methodology may be problematic.

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