Locke Lord QuickStudy: Public Companies Face “Pay for Performance” Disclosure Based on Total Shareholder Return

Public company proxy statements would have to disclose the total compensation "actually paid" to their principal executive officers over the previous five years, then describe the relationship between that compensation and the total shareholder return (TSR) for the company and its peer group over the same period. These are requirements newly proposed by the Securities and Exchange Commission,¹ following a mandate in the Dodd-Frank Act.

These anticipated disclosures have generated controversy that will undoubtedly be reflected in the upcoming comment process. The rule would require specific tabular disclosure of the company's TSR in a year with the compensation paid in that year, even though the decisions behind that compensation may have been made much earlier. The choice of TSR as the required measure of a company's "performance" has already been criticized as an imperfect, or at least insufficient, way to judge management’s performance. There will be significant pressure to permit issuers more flexibility to determine how best to communicate their compensation story to investors.

The substance of the proposal is as follows:

Companies² would need to disclose in a new table the following information for each of the five previous fiscal years:³

a) the total executive compensation reported in the Summary Compensation Table for the chief executive officer;
b) an average of the reported amounts for the remaining named executive officers (NEOs);
c) compensation actually paid to the CEO and the average of the compensation amounts actually paid to the other NEOs

• This adjusts the figures disclosed under (a) and (b) above by substituting the vesting date fair value of equity awards that vested during the year in lieu of the grant date values that were included in the Summary Compensation Table.
  • Companies that provide a pension would adjust the total change in actuarial pension value for changes in interest rates and certain actuarial factors, and above-market or preferential earnings on any nonqualified deferred compensation would be added.

d) the company’s annual total shareholder return (TSR);⁴ and
e) the annual TSR of the companies in the peer group identified in the company’s stock performance graph or in its compensation discussion and analysis (CD&A).

Following this table, the company would describe in narrative and/or graphical format:

• the relationship between the executive compensation actually paid and the company’s TSR and
• the relationship between the company’s TSR and the peer group’s TSR.

A company may provide additional information about the relationship between executives’ compensation and the company’s performance that it deems helpful, provided that it is not misleading nor more prominent than the required disclosure.

Provoking additional controversy, the proposal also requires companies to provide the new disclosure in interactive data format using eXtensible Business Reporting Language (XBRL) as an exhibit to the filed proxy statement.⁵ Whether XBRL is widely used or provides any benefits is the subject of debate.

The comment period for the proposal is open for 60 days. If you would like to discuss submitting comments, please contact one of the authors of this Locke Lord QuickStudy or the Locke Lord lawyer who normally handles your matters.

Endnotes
¹ Rel. 34-74835 (April 29, 2015) – http://www.sec.gov/rules/proposed/2015/34-74835.pdf
² As proposed, smaller reporting companies would be subject to the new requirement, but emerging growth companies, foreign private issuers and registered investment companies would not.
³ Subject to a three-year phase-in. The total period covered would be three years for smaller reporting companies, subject to a two-year phase-in.
⁴ TSR would be calculated in the same manner as for the stock performance graph included in the annual report to shareholders.
⁵ Smaller reporting companies may defer compliance with the XBRL requirement for three years.