NEW YORK (July 23, 2015) –New analysis from executive compensation consulting firm Pay Governance (paygovernance.com) finds that the SEC’s recently proposed pay-for-performance proxy disclosure requirements may force companies to display a pay-for-performance misalignment that is incorrect.
Pay Governance analyzed the proposed rules, which are part of the long-delayed rule-making process under the Dodd-Frank Act. These SEC rules require companies to compare executive “compensation actually paid” to company total shareholder returns and peer group total shareholder returns. While the SEC’s intention was to clarify pay-for-performance analysis and disclosure, Pay Governance’s review indicates several problematic provisions in the proposed rules. Most importantly, the SEC methodology would require companies to compare the value of stock awards vesting in a particular year to contemporaneous company stock performance. This approach may be problematic because equity awards vesting in a particular year most likely were granted years before the mandated performance measurement period.
“Stock-based awards are granted with the express intention that their value will change with any changes in the company’s share price. We have long-established methodologies such as realizable pay to compare how well the value of executive stock awards tracks company share price changes,” said Ira Kay, managing partner at Pay Governance. “Unfortunately, the SEC chose to measure executive equity awards at vesting, where any alignment or misalignment with end-of-year stock returns is inherently coincidental, or even false.”
Pay Governance submitted a comment letter to the SEC explaining the firm’s technical concerns with the proposed pay-for-performance comparison methodology, but it remains unclear if the finalized rules will change significantly from those already proposed.
Many public companies are eager to understand how the rules will impact their ability to accurately demonstrate aligned pay-for-performance. The consulting firm has modeled the required disclosure tables for numerous companies in the past several weeks.
“Based on our pro-forma analyses, we are concerned about ‘false negatives’; that is, mandated disclosures where the SEC methodology shows a false misalignment between executive pay and company performance,” said Pay Governance Consultant Blaine Martin.
Pay Governance is recommending that companies provide the allowed supplemental disclosure of pay-for-performance analysis using realizable pay in their proxy statements. This is especially important in cases of a “false negative” from the SEC-prescribed disclosure. Unlike the SEC’s “compensation actually paid” methodology, realizable pay measures the degree of economic alignment between pay and performance by using updated values of equity grants provided to executives during the exact same period over which stock returns are measured. Realizable pay also can be compared between peer companies and relative to compensation opportunity.
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For more details on this Pay Governance study or to schedule an interview, please call Don Rountree at 770.645.4545.
Pay Governance LLC is an independent consulting firm focused on delivering advisory services to compensation committees. The consultancy also advises the management of companies in situations in which the firm does not serve as the independent committee advisor. Pay Governance has locations throughout the United States in New York, Boston, Detroit, Philadelphia, Pittsburgh, Chicago, St. Louis, Dallas, Cleveland, Charlotte, St. Petersburg, San Francisco and Los Angeles. The firm also has strategic affiliate relationships with Pay Governance Japan and Pay Governance Korea. For more information, visit www.paygovernance.com.