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Corporate Pay and Performance to be Aligned Under New SEC Rule

By:
S.J. Steinhardt
Published Date:
Aug 30, 2022

SEC 240x240 Blue

Seven years after it initially proposed a rule requiring companies to link executive compensation and corporate performance, the Securities and Exchange Commission (SEC) has finally voted to implement it, pursuant to the 2010 Dodd-Frank ActThe Wall Street Journal reported. The vote was 3-2. 

The rule will "become effective 30 days following publication of the release in the Federal Register," according to an SEC press release. "Registrants must begin to comply with the new disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022."

The rule was first proposed in 2015, but deferred, as the two Republican appointees voting against it argued in favor of addressing more pressing issues that needed to be addressed under the provisions of the law.  SEC Chair Gary Gensler took the proposed rule up again this past January by seeking additional feedback.

According to the SEC, "the amendments require registrants to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years. With respect to the measures of performance, a registrant will be required to report its total shareholder return (TSR), the TSR of companies in the registrant's peer group, its net income, and a financial performance measure chosen by the registrant. Using the information presented in the table, registrants will be required to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group. A registrant will also be required to provide a list of three to seven financial performance measures that it determines are its most important performance measures for linking executive compensation actually paid to company performance. Smaller reporting companies will be subject to scaled disclosure requirements under the rules."

Hester Peirce, one of the two Republicans voting no this time, called the rule “unnecessarily complicated" and said that it will be "costly for companies to implement.”

“Today’s rule makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies,” Gensler countered in a statement.

The Commission is also pressing ahead with another proposed rule under Dodd-Frank: revoking the pay of top executives of companies whose financial results contain errors. That rule was proposed in June and is now in the public feedback stage. 

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