April 29, 2015
On April 29, 2015, the SEC released a proposal to enact Section 953 of the Dodd-Frank Act. Section 953 deals with the relationship between compensation and company performance. This is the second executive compensation rule proposed this year by the SEC, following the hedging rule proposed in February.
Section 953 requires issuers to include information that shows the relationship between executive compensation actually paid and company financial performance. The comparison must be included in all proxies and consent solicitations, and may be represented graphically.
The proposed rule outlines several key areas:
Pay Definition: Total compensation actually paid is defined as total compensation as disclosed in the Summary Compensation Table, excluding changes in actuarial present value of benefits and the value of equity awards at vesting rather than the value when granted.
Performance Definition: Performance is defined as cumulative total shareholder return (TSR) over the five most recently completed fiscal years. Registrant must disclose its TSR as well as a peer group TSR.
Executive compensation disclosure for the CEO and an average of the other Named Executive Officers (NEOs) is required to be presented.
The disclosure must be provided in an interactive data format, requiring issuers to tag each value of executive compensation and TSR.
Issuers are also required to describe the relationship between compensation and TSR and the relationship between the issuer TSR and peer group TSR as a narrative, a graphic, or a combination of the two.
Small Company Exception: Smaller companies are required to disclose only three years of information, and they are not required to disclose a peer group TSR.
This is the third proposed rule currently awaiting finalization by the SEC. The only remaining rule related to executive compensation that has yet to be proposed is Section 954, which mandates the disclosure of a company’s clawback policy.