The SEC’s Proposed Pay-Versus-Performance Disclosure Rule Explored
In April 2015, the Securities and Exchange Commission (SEC) introduced the Pay-Versus-Performance proposal which would compel all public companies to disclose the relationship between compensation paid to Named Executive Officers (NEOs) and the financial performance of the registrants. The disclosure will provide shareholders a new standard in assessing a company's executive compensation relative to its financial performance.
Notably, the proposal would require companies to provide information in XBRL (eXtensible Business Reporting Language) format, which may ease evaluation of executive compensation policies and thereby benefit the shareholders.
In this two-hour LIVE webcast, a panel of key thought leaders and practitioners invited by The Knowledge Group will review The SEC's Proposed Pay-Versus-Performance Disclosure Rule and help executive officers, shareholders, securities issuers, and more importantly public companies understand how the rule will affect their reporting requirements and suggest how to comply with the proposed rule.
Key topics include:
- Pay-Versus-Performance Disclosure – An Overview
- Extensible Business Reporting Language (XBRL) Requirement
- Pay-Versus-Performance Table
- How Pay for Performance Analysis Should Be Done
- Why “Compensation Actually Paid” Will Show Little Correlation of Pay and Performance
- How the SEC Could Improve the Proposed Disclosure
- How Companies Can Supplement the Required Disclosure to Provide More Meaningful Pay for Performance Analysis
- Reporting Requirements
Kenneth J. Laverriere, Partner
Shearman & Sterling LLP
- The companies that are covered by the rule and in which SEC filings these companies need to include the required disclosures.
- The information that is required to be included on the pay vs. performance table required by Item 402(v).
- The manner of determining compensation “actually paid” and how this calculation differs from the total compensation figure required for the summary compensation table.
- The requirement of providing total shareholder return (“TSR”), including questions of how to calculate this figure, and the controversy surrounding whether TSR is the ideal metric for measuring company performance.
- The required description of the relationship between (1) the compensation “actually paid” to the PEO and the average compensation “actually paid” to the NEOs, and (2) the TSR of the company and its peer group.
Nora McCord, Managing Director
Steven Hall & Partners, LLC
- The rules, as proposed, provide a very prescriptive approach to defining both pay and performance. They provide little latitude for companies to tailor disclosure to their specific facts and circumstances. For this reason, companies are likely to continue to focus the bulk of their discussion around the alignment of pay and performance in the CD&A.
- Making changes to the pay program to better align pay and performance in this table is likely not advisable. Companies should continue to do what makes the most sense for them in terms of pay vehicles, performance metrics, performance comparator groups and performance periods. However, one change which may help to ensure a greater alignment would be to move equity vesting periods to December 31, to align totally with the TSR calculations.
- The definition of compensation actually paid includes some important steps in the right direction. The modifications to the pension value, as well as the decision to value equity awards on the date of vest, are valuable. That said, decision to use the Black-Scholes value of the options on the date of vest is controversial – it injects assumptions about future performance into the value of the award, which seems at odds with the stated intent of the calculation.
- The default to TSR as the sole metric assessing performance is unfortunate. While TSR is certainly an important metric, many companies have been working diligently over the past several years to ensure that all material drivers of performance are incorporated into their pay program, and to ensure that payouts are commensurate with performance. Although over time pay should also correlate with stock price performance, there are any number of reasons why this might not always be true, especially when we consider a single performance assessment date.
- As drafted, the proposed rule has a timing disconnect. The table requires TSR calculated for five different cumulative periods, depending upon the compensation year, while the compensation value is an annual one. Companies may wish to consider adding additional TSR periods to demonstrate better alignment.
- The proposed regulations permit companies to include additional graphs and discussion to provide context for the required tabular disclosure. There are two competing schools of thought on how to approach this. One camp believes that companies should provide tabular disclosure and brief discussion as required, but leave the bulk of the pay for performance disclosure in the CD&A. Another camp believes that it will be critical to provide context for this disclosure, and believe that the required disclosure should be supplemented with extensive additional materials to provide context, especially if the alignment between pay and performance doesn’t look good.
David Outlaw, Manager, Valuation Services
- The proposed rule comes amidst lots of other regulatory updates affecting share-based compensation, including the FASB’s proposed revisions to the relevant accounting guidance. Interestingly, the SEC seems to be moving in the opposite direction from the FASB: the FASB’s revisions are intended to drive simplification, whereas the SEC regulations are layering in additional complexity. This is in line with a broader recent trend toward more analytical, data-driven proxy statements.
- The Summary Compensation Table (SCT) figures fall short when it comes to analyzing pay vs. performance alignment, particularly when it comes to multi-year equity compensation awards. We will discuss how the “compensation actually paid” figures differ from the SCT figures and why the SEC chose these definitions to meet the goals of the disclosure.
- The complexity of calculating compensation actually paid for equity awards will vary depending on the instruments a company issues to its executives. For example, restricted shares and many performance awards are fairly straightforward. Options are trickier to value as of the vest date, and for some companies, the Black-Scholes formula may not be usable.
- The calculation of total shareholder return (TSR) in the proposed rule is somewhat unique, and very likely differs from what a company is doing for its actual TSR awards. We will discuss the details of the calculation and the potential impact of the different conventions.
- With TSR awards already commonly issued, we might see some refinement of actual award terms—including the timing of vesting and performance measurement and the length of the performance period—to more closely align outcomes with the required calculations under this disclosure.
Stephen F. O'Byrne, President
Shareholder Value Advisors Inc.
- How pay for performance analysis should be done (and can be done with considerable programming).
- Measure the three dimensions of pay for performance: pay leverage, pay alignment and the pay premium at peer group average performance using “mark to market” pay as well as grant date pay.
- Use the three measures to understand the requirements of “perfect” pay for performance, i.e., what pay design provides perfect alignment, a zero pay premium at peer group average performance and any target pay leverage?
- The prevalence of pay for performance “issues” (i.e., low alignment, excess cost or excessive leverage), and the need for more informative pay for performance disclosure.
- Why “compensation actually paid” is a very poor proxy for mark to market pay (which should be the focus of pay for performance analysis).
- How the SEC could improve the proposed disclosure.
- How companies can supplement the required disclosure to provide more meaningful pay for performance analysis.
- Why alignment with relative TSR is much more important than alignment with gross TSR.
Who Should Attend:
- Attorneys General
- In-house Counsel
- Executive Officers
- Public Companies
- Securities Issuers
- Other Related/Interested Professionals and Organizations
Nora McCord, Managing Director, joined Steven Hall & Partners in December 2005.
Ms. McCord advises clients on the design and implementation of executive compensation and board remuneration programs and assists clients in the development of comprehensive shareholder outreach programs, including CD&A drafting and creation of shareholder talking points and presentation materials. Ms. McCord also spearheads the Firm’s expert witness and litigation support practice.
Ms. McCord is a frequent speaker and author on compensation and corporate governance topics for organizations such as WorldatWork, The Conference Board, National Association of Corporate Directors, National Association of Stock Planning Professionals, Global Equity Organization, and Directorship. She has also been quoted in publications such as The Wall Street Journal, The New York Times, The San Francisco Chronicle, TradeWinds, Agenda, Directorship and The Huffington Post and has been interviewed on NPR’s Marketplace.
Prior to joining Steven Hall & Partners, Ms. McCord served as Senior Manager in charge of research operations with Equilar, Inc.
Ms. McCord holds a master’s degree from Georgetown University’s McCourt School of Public Policy and a B.S. from Georgetown University’s Edmund A. Walsh School of Foreign Service.
Nora McCord, Managing Director, joined Steven Hall & Partners in December 2005. Ms. McCord advises clients on the design and …
Stephen F. O’Byrne is President and co-founder of Shareholder Value Advisors Inc., a consulting firm that helps companies increase shareholder value through better performance measurement, incentive compensation and valuation analysis. His work on measuring the strength and cost-efficiency of top management incentives has been published in the Harvard Business Review, the Journal of Investing, Conference Board Director Notes, the Journal of Applied Corporate Finance and the WorldatWork Journal. He is the co-author, with Professor David Young of INSEAD, of EVA and Value-Based Management. He was previously head of the compensation consulting practice at Stern Stewart & Co. and a Principal in the executive compensation practice at Towers Perrin.
Stephen F. O’Byrne is President and co-founder of Shareholder Value Advisors Inc., a consulting firm that helps companies increase shareholder …
Kenneth J. Laverriere is a partner in the Executive Compensation & Employee Benefits Group. He advises fiduciaries on the investment of the assets of pension plans and the design and administration of tax-qualified and nonqualified plans and the application of ERISA’s plan asset rules to plan investments. His practice includes the structuring and analysis of a broad range of compensation arrangements, including equity and non-equity based incentive programs, deferred compensation plans, investment partnerships, carried interest plans, and financial adviser compensation programs. Mr. Laverriere works with financial organizations, asset management firms and investment funds on all aspects of ERISA compliance. Mr. Laverriere advises clients on compensation and benefit issues in merger and acquisition transactions in various industries and market sectors. Mr. Laverriere represents individuals and corporations in the negotiation of employment, termination and change in control arrangements. Mr. Laverriere also works closely with the litigation group on ERISA litigation matters and the bankruptcy and reorganization group in insolvency proceedings.
Kenneth J. Laverriere is a partner in the Executive Compensation & Employee Benefits Group. He advises fiduciaries on the investment …
David Outlaw is a Manager in the Valuation Services Group at Equity Methods. David manages many of the valuation practice’s largest and most complex engagements, and plays an integral practice development role throughout the firm. In the projects he oversees, David is responsible for coordinating staff activities, internal review and assurance, and overall client management. David has played an essential role in the practice’s build-out of capabilities in addressing complex modifications, business combinations, and spin-out transactions, as well as the quantitative disclosures required by the SEC pursuant to Dodd-Frank. David has extensive experience in publishing thought leadership articles on relevant equity compensation topics, and enjoys working closely with his clients on addressing new and emerging technical challenges. He holds a BS in finance and a BS in economics, both from the Barrett Honors College at Arizona State University.
David Outlaw is a Manager in the Valuation Services Group at Equity Methods. David manages many of the valuation practice’s …
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About Steven Hall & Partners, LLC
Steven Hall & Partners is an independent compensation consulting firm, specializing exclusively in the areas of executive compensation, board remuneration and related corporate governance issues. By focusing solely on this critical and complex segment of the human resources arena, we are able to provide our clients with the highest quality expertise and best counsel available on a practical basis. We have over 30 years of experience serving a wide range of clients, including for-profit public and private companies and not-for-profit organizations, ranging from the very small (revenues of under $50 million) to the very large (revenues in excess of $50 billion) in many different industries.
About Shearman & Sterling LLP
Shearman & Sterling has been advising many of the world's leading corporations and financial institutions, governments and governmental organizations for more than 140 years. The firm's insightful and valuable legal counsel has resulted in groundbreaking transactions in all major regions of the world. The lawyers in Shearman & Sterling's Compensation, Governance & ERISA Group advise public and private companies and corporate boards and committees across all industry segments on the full spectrum of compensation, governance and employee benefits issues. With decades of experience, they are trusted advisers to their clients, helping them carefully navigate the competing interests of executives, corporations and shareholders.
About Equity Methods
Equity Methods helps HR and executive compensation professionals get more benefit from their equity-based compensation programs. We provide compensation analytics and design modeling for TSR awards, performance conditions, post-vest holding periods, and other long-term incentive programs. Our financial reporting and valuation professionals help you prepare for required pay vs. performance and pay ratio disclosures. Award modification services help you manage termination events, changes to performance targets, M&A events, and more without introducing unexpected accounting outcomes. Finally, we develop communications that educate award recipients, raise awareness of award performance, and tie performance to your company’s strategic initiatives. Through the power of modeling, we bring insight and transparency to your award planning, design, and management. To learn more, visit www.equitymethods.com.