On August 25, 2022, the Securities and Exchange Commission (SEC) adopted final rules implementing the pay versus performance disclosure requirement called for by the Dodd-Frank Act. According to a statement from SEC Chair Gary Gensler following its adoption, the pay versus performance rule “will strengthen the transparency and quality of executive compensation disclosure to investors.”
Companies with fiscal years ending after December 15, 2022 must issue pay versus performance disclosures in accordance with the new rule prior to their next shareholder meeting.
Why It Matters
While public companies have been disclosing — and shareholders have been voting on — executive compensation for years, the new rule will standardize and expand how issuers disclose pay-for-performance.
The final ruling from the SEC on Dodd-Frank pay-versus-performance will standardize how companies calculate and justify executive compensation. While the table required by the SEC is similar to analysis currently performed by proxy advisors or compensation consultants, very few public companies provide the metrics or the format required by the SEC to justify compensation directly to shareholders.
This rule makes it easier for investors and proxy advisors to conduct apples-to-apples comparisons when they analyze executive compensation. As a result, public companies will be under new scrutiny to align compensation with market and industry standards, as well as shareholder expectations. This level of disclosure will be new to many publicly traded companies. Consequently, they will have to put in more research to identify relevant peers, benchmark company performance and executive compensation, and ultimately justify compensation decisions to investors and proxy advisors before their next shareholder meeting to avoid shareholder misalignment or potential proxy fights.
What To Do Next
Due to the scope and specificity of the disclosure and calculations required for the new rule, public companies should begin preparing for compliance with the new rules well ahead of their annual general meeting. Coordinating internal efforts as soon as possible with key company departments (e.g., legal, finance, human resources, investor relations, public relations) and outside advisers (e.g., compensation consultant, valuation expert and legal counsel) should be prioritized. The calculation of compensation actually paid has the potential to be time-intensive, particularly when it comes to market-based performance awards and stock options. Submitting disclosures ahead of the deadline provides proxy advisors and investors time for thoughtful review, building confidence and goodwill.
To learn more about the Dodd-Frank Pay Versus Performance rule, join us on Tuesday, October 4 at 11 a.m. EST. Our panel of experts will discuss the proposed rule, what it means for public companies and action they can take now to be prepared for their next shareholder meeting. Register at this link prior to October 4th. Afterwards, a recording of the discussion will be available at the same link.
How Diligent Can Help
Diligent empowers your board with Glass Lewis voting recommendations and equips your CHROs and compensation professionals with the right data to independently analyze and disclose pay versus performance requirements outlined by the Dodd-Frank Act.
Our benchmarking tools empower public companies to run the same pay versus performance analysis as used by investors, proxy advisors and compensation consultants in order to comply with the amended Dodd-Frank executive compensation requirements, including:
Calculating and communicating total shareholder return relative to your company’s peer group
Benchmarking company performance in other key measures like net income
Identifying relevant financial performance measures shared by peers and respected by proxy advisors to help anticipate stakeholder responses