It’s beginning to look this is going to be the year of Dodd-Frank rulemaking at the SEC.  We may have the CEO pay-ratio disclosure rules by the end of the year, the SEC recently proposed rules for hedging policy disclosures, and now the SEC appears poised to propose the pay-for-performance disclosure rules this week.

Readers will recall that Dodd-Frank requires the SEC to promulgate rules requiring public companies to disclose how executive compensation related to company financial performance (see my blog entry, “Beyond Say-on-Pay,” August 5, 2010). In his April 24 blog on TheCorporateCounsel.net, Broc Romanek noted that the SEC has calendared an open Commission meeting for this Wednesday, April 29, to propose the new rules.

Broc’s Eight Cents

Broc offered eight points of analysis on this disclosure:

1. Companies can get the data and crunch the numbers. I don’t think that the actual implementation itself will be difficult.

2. But I think what could be particularly worrisome is having yet another metric to figure out what the CEO got paid and trying to explain all of it.

3. You know how companies have different schemes for granting equity, including type and timing. If the rules tend to try to fit everyone into a narrow bucket in order to try to line everyone up for comparability, and a company’s program doesn’t quite fit neatly into it, then the disclosure can get even more complicated.

4. There are two elements: compensation and financial performance. What is meant by “financial performance” for example? Maybe the SEC will just ask for stock price, maybe they’ll go broader.

5. A tricky part likely will be the explanation of what it all means—and how it works with the Summary Compensation Table.

6. I don’t think it will be difficult to produce the “math” showing the relationship of realized/realizable pay relative to TSR and other financial metrics, so long as:

– There’s a tight definition of realized pay

– We know what period to measure TSR (and if multiple periods can be used)

– We know what other performance measures can be included (if any) and if they can be as prominent in the disclosure as TSR

7. Another area of potential difficulty is explaining why there is not a tight or tighter correlation with TSR (“we use metrics other than TSR to drive our compensation; thus, the correlation is not very strong; on the other hand, our compensation is based on Revenue Growth and EBITDA Margin, and as Exhibit II demonstrates, the correlation is very significant”).

In addition, Dodd-Frank has no requirement for a relative ranking, and companies will need to decide if TSR and Pay should be put in some type of relative context (“relative to our peers, our realizable pay was well below the peers; so even though compensation is not tightly aligned with stock price performance the last 3 years, we did not pay our bums very much).

8. I think what may be the most difficult to address is a requirement to discuss what the Compensation Committee plans to change—and why is it now that it has performed the analysis?

Let’s Make It a Dime; Here’s My Two Cents

I’m not sure that the problem with executive compensation is that companies aren’t disclosing enough information about it.  Isn’t this what the CD&A is for?  Isn’t this why the stock performance graph is included with the executive compensation disclosures?

Moreover, does anyone think that any company will just come out and say that their executive compensation is not based on or tied to company performance in any way?  I’m just not sure that public companies need one more disclosure to try to convince their shareholders that the amount of compensation they are paying to their executives is justified by the company’s performance.

– Barbara