SEC is seeking more clarity on executive pay
Mary Jo White, chairwoman of the Securities and Exchange
Commission, in 2013. The agency proposed new rules comparing
executive pay with corporate performance. (T.J. Kirkpatrick /
James F. Peltz
SEC proposes rules comparing executive pay with corporate performance
'Pay versus performance' rules for executive compensation proposed by
2015, 5:44 PM
as stock prices tumbled and the country was plunged into a deep
recession in 2008, seven of California's 10 highest-paid chief
executives got sizable raises, lifting the average pay package to $32
That same year, Wall Street bankers
gave themselves nearly $20 billion in bonuses as the government spent
billions of dollars to bail out financial institutions. President
Obama called the bonuses “shameful.”
The public outrage continues, and
now the Securities and Exchange Commission is taking another step to
help shareholders decide whether to rein in executive pay.
The SEC's commissioners voted 3-2
on Wednesday to require publicly held companies to disclose “in a
clear manner” more details about how executive pay compares to a
company's total shareholder return; that is, the annual change in its
stock price plus dividends.
The data in many cases would
provide the compensation and total-return data going back five years.
Companies also would have to provide total-return data for firms in
its industry or peer group.
The proposed rules were mandated by
the Dodd-Frank financial law that grew out of the 2008 crisis.
A company's shareholders don't by
themselves directly decide how much an executive is paid, information
that companies already spell out in detail in annual proxy statements
filed with the SEC.
But investors can decide whether to
push for bylaws curbing executive pay or whether to elect the
directors who are on board committees that decide executive-pay
The SEC's rules would give
shareholders “a new metric for assessing a company's executive
compensation relative to its financial performance,” SEC Chairwoman
Mary Jo White said at Wednesday's meeting in Washington before voting
to approve the proposal.
Ahead of the meeting, the SEC said
the rules also “would provide greater transparency and allow
shareholders to be better informed when they vote to elect directors
or vote on executive compensation.”
Michael Hermsen, a former SEC
lawyer who is now a partner with the law firm Mayer Brown in Chicago,
said the proposed rules “will crystallize some of the discussion”
among investors as to whether an executive's pay is warranted.
“It's going to provide information
in a very precise format,” he said.
But Hermsen and some others
wondered whether a company's total shareholder return is the best
measure against which to gauge executive-pay packages.
Even White raised the question: “Is
total shareholder return the optimal measure of financial performance,
as the rule proposes?”
White said she was “very interested
in receiving public comment on the proposal … and potential
alternatives” to the proposed rules approved Wednesday.
The proposal is subject to a
public-comment period of 60 days, after which the SEC's staff would
make a renewed recommendation on the rules to the commissioners.
Then a second vote by the
commissioners is required before the rules take effect. So the rules
might be in place by next year's annual-meeting season in the spring.
Gary Lutin, chairman of the
Shareholder Forum, which provides information for investor decisions,
said he was “glad to see that chairwoman White encouraged debate about
what would be the right performance measure.”
Using total shareholder return
might provide a fairly uniform measure for the public, but the number
might not always represent the true health of an underlying company,
he and others said.
For instance, a company that has
gone through a merger using lots of debt might have a robust stock
price for one year yet remain hobbled by the leverage over the long
term, he said.
“It's important to shift the focus
from current stock price, which is easily manipulated by all the wrong
things, to a focus on operating performance that will encourage
building sound companies,” Lutin said.
White said that during the
public-comment period, she also wanted to hear how the rules would
affect smaller publicly held firms. Those firms, whose size under the
rules wasn't immediately available, would have to provide data going
back only three years.
“I am particularly interested in
views about how investors in smaller reporting companies will use this
information, and the costs to these companies of providing this
information,” she said.
Copyright © 2015,
Los Angeles Times