The US Securities and Exchange Commission released draft measures at the end of April that would require companies to disclose the relationship between executive remuneration and total shareholder return (TSR) over a five year period.
The proposed rules require companies to include a table in their disclosure with the following information:
Executive remuneration actually paid for:
The principal executive officer; and
An average of the remaining named executive officers who are covered by disclosure requirements.
Remuneration actually paid treats pension payments and equity awards differently than current disclosures:
Equity awards – Under the proposal, equity awards would be considered actually paid on the date of vesting and at fair value on that date rather than recorded at the fair value on the grant date (as required in the summary compensation table included in current disclosures).
Pension payments – Pension payments are considered as the actuarially determined service cost for services rendered by the executive during the applicable year.
The total executive remuneration reported in the summary compensation table already included in current disclosures.
The company’s TSR on an annual basis.
The TSR on an annual basis of the companies in a peer group.
Large companies have to provide this information for five years (with a phase in period where the first year of the rule’s application only requires three years’ information and the second year requires four), while smaller reporting companies only have to disclose the last three fiscal years (with a phase in period where the first year of the rule’s application only requires two years’ information). These smaller companies are also excluded from the requirement of disclosing TSR for a peer group of companies and the requirement to make the necessary pension adjustments for the remuneration actually paid.
Companies need to use an interactive data format for the disclosure, with this requirement being phased in for smaller companies.
Using the above information, companies are expected to explain the relationship between the remuneration actually paid and the company’s TSR, as well as comment on the relationship between the TSR of the company and its peer group, either in text or graphical format.
The proposed rules would apply to all reporting companies except for foreign private issuers, registered investment companies and emerging growth companies, which are exempt from the statutory requirement.
The proposed rules are currently in consultation. There is no proposed effective date, however, it could be as early as the 2016 proxy season.
Some comments that have been made by industry stakeholders have included:
- The new disclosure may lead to proxy advisors and institutional investors seeking to apply a pay for performance correlation across the board.
- Companies that are using a combination of measures or a measure other than TSR will run the risk of showing increased pay at a time where TSR has not increased proportionally. This may encourage them to adopt purely TSR measures for their incentive plans. Given the questions that are being raised in other jurisdictions about the wide use and efficacy of total shareholder return if not properly targeted, this could be controversial.
- The actual vesting of awards to the executive is often delayed from the end of the performance period and often occurs in the next financial year, which will affect the correlation between pay and TSR performance.
- Most long term incentive plans have longer timeframes than one year, so five annual values of TSR won’t necessarily align with the vesting of awards from a longer term equity grant.
- It is unclear whether shares that are restricted post vesting will be considered to have “vested” for the purposes of the table.
It will be interesting to see what changes are proposed to this draft and the effects of the finalised rule post implementation on US incentive plans.