SEC Finalizes Pay Versus Performance Disclosure Requirement
The Dodd-Frank Act required companies to compare their financial performance against the compensation paid to the company’s principal executive officer and other executive officers. Section 953 (a) of the Dodd-Frank Act [1] mandates the Securities and Exchange Commission to adopt rules requiring public companies to describe the relationship between these two entities clearly. This is referred to as the Pay versus Performance disclosure requirements.
The Dodd-Frank Act isn’t new to the regulatory world, but the rule’s sudden adoption after all these years has truly surprised everyone. Adopting this old-yet-new rule is described and discussed in a press release and fact sheet.
SEC’s Pay versus Performance Disclosure Requirement
This rule will surface in the name of New Item 402 (v) of Regulation S-K, which would require companies to provide a detailed table disclosing the executive compensations and the company’s financial performance in the last five fiscal years.
This table will also include:
- A summary compensation table will measure the total compensation and executive compensation paid to the principal executive and other named executive officers as prescribed by the rule.
- The financial performance parameters like – Total Shareholder Return (TSR) for the company, TSR for the company’s peer group, the net income of the company and
- A critical parameter that assesses the company’s financial performance and is specific to only that company. It should also aptly represent the link between a company’s compensation and performance measures.
Item 402 (v) strictly mandates a company to describe the relationship between the financial performance measures and the executive compensations paid to its principal and other executive officers over the last five fiscal years.
It also requires a company to determine the most important measures of financial performance and list three to seven of them. If a non-financial measure is among the company’s “most important measures” then the companies are allowed to include them in the list. This is permitted but not particularly mandated for companies.
Most importantly, the Pay versus Performance disclosures are required to be tagged using the Inline XBRL format.
While some believe that the rule “will elicit costly, complicated, disclosure of questionable utility” others believe it is a step forward in the right direction for companies looking to revise their calculations and provide fair compensation values based on these metrics.
