Today the Commission adopted a rule that provides investors with information about how corporate executives are paid. That is, quite simply, it. This rule does not regulate the way companies incentivize their executives, but rather the disclosures that companies are required to make about such compensation. More specifically, Pay Versus Performance disclosures give investors insight into how performance measures impact executive compensation, in order to allow investors to better understand how boards pay their company executives.
Congress enacted Section 14(i) of the Exchange Act and other executive compensation reforms as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Those provisions, among other things, provide disclosure into an area that had inadequate transparency. The Global Financial Crisis of 2007-2008 put the lack of transparency into stark relief, as executives received multimillion-dollar pay packages for short-term gains that contributed to disastrous results.
After hearing testimony on the matter, the Senate Banking Committee issued a report that quoted an adage coined by Louis Brandeis, “sunlight is the best disinfectant.”
Those words encapsulate a simple and powerful idea that governs much of our securities markets: transparency is cleansing and improves markets for both companies and investors. Transparency can be directed into areas of opaqueness as needed, it helps prevent fraud, and is a key feature of our markets, which have become the gold standard of capital markets across the globe….Different types and categories of disclosure become more important as our economy, financial markets, and market practices change and evolve….
as several commenters noted, the underlying performance measures that are used to determine executive pay in today’s market for executive compensation encompass a broader mix – both quantitative and qualitative; financial and nonfinancial. Further, roughly 70% of executive pay plans consider nonfinancial measures, and these can include employee engagement, customer service, and safety….
In response to comments and developments in market practice, the final Pay Versus Performance rule made a change from what was proposed to permit companies to include nonfinancial performance measures in a list of their three to seven “most important” measures and also disclose such measures in a table as they see fit. By contrast, financial measures are required to be disclosed if companies are linking pay and performance to them. It remains to be seen whether companies will make sufficient disclosures to investors through permissive inclusion of nonfinancial measures versus requiring disclosure on the same footing as financial measures. We will have to make that determination over time, as we see if there is adequate sunshine and visibility into executive compensation packages and the measures used in them. Today’s rule is an important first step that I am pleased to see the Commission take. [footnotes omitted]SEC.gov | Late Summer Sunshine: Statement on the Adoption of Pay Versus Performance