April 24, 2015

The SEC’s Coming Pay-for-Performance Proposal: My Eight Cents

As I blogged yesterday, the SEC has calendared an open Commission meeting for Wednesday, April 29th to finally propose the pay-for-performance rules as required by Dodd-Frank. This rulemaking is important as it could become the new standard for measuring pay and performance.

We’ll have to see what exactly the SEC proposes when the proposing release is out – but if it comes out in a form as expected, here are my 8 points of analysis:

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?

Early bird expires at the end of today. These proposed rules will be among many topics that Corp Fin Director Keith Higgins & other experts will be talking about at our popular Conferences – “Tackling Your 2016 Compensation Disclosures: Proxy Disclosure Conference” & “Say-on-Pay Workshop: 12th Annual Executive Compensation Conference” – to be held October 27-28th in San Diego and via Live Nationwide Video Webcast. Register now. Here are the agendas – 20 panels over two days, including:

– Keith Higgins Speaks: The Latest from the SEC
– The SEC’s New Pay-for-Performance Proposal
– Proxy Access: Tackling the Challenges
– Disclosure Effectiveness: What Investors Really Want to See
– Pay Ratio: What Now
– Peer Group Disclosures: The In-House Perspective
– Creating Effective Clawbacks (and Disclosures)
– Pledging & Hedging Disclosures
– The Executive Summary
– The Art of Communication
– Dave & Marty: Smashmouth
– Dealing with the Complexities of Perks
– The Big Kahuna: Your Burning Questions Answered
– The SEC All-Stars: The Bleeding Edge
– The Investors Speak
– Navigating ISS & Glass Lewis
– Hot Topics: 50 Practical Nuggets in 75 Minutes

Early Bird Rates – Act by the end of Friday, April 24th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by the end of Friday, April 24th to take advantage of the 33% discount.

CD&A Template: CFA Institute Has Its 2.0

Last October, I blogged it was coming – and now it’s here (albeit a bit late for this proxy season). The CFA Institute has updated its CD&A Template, last issued in 2011. Here’s a blog from Matt Orsagh explaining the changes – particularly focusing on how the updated Template supports better pay-for-performance storytelling…

Happy Retirement! Lydia Beebe & Amy Goodman

Two of my favorites recently decided to retire, Chevron’s Lydia Beebe & Gibson Dunn’s Amy Goodman. They won’t totally disappear – but they will be unburdened from their day job. I saw both of them a few days ago at Lydia’s bash – they were looking good!



– Broc Romanek