The Wall Street Journal this morning (April 29th) reports that the SEC is proposing new regulations requiring further substantial disclosure of executive compensation, as mandated by the 2010 Dodd-Frank Act. (Note: SEC releases now confirm….)
Although the proposals will require disclosure both for the CEO and the five highest paid executives, and will track the disclosure over a five year period, the devil as ever will be in the details. It looks like some new measures of compensation are involved. For example, calculation for the five highest paid executives is set to exclude certain components otherwise reported in existing SEC requirements, such as the value of share grants that have not yet vested.
Disclosure also will attempt to tie actual pay to “total shareholder return,” a measure companies are already required to disclose in proxy statements.
The proposed rules will be subject to public comment and perhaps modification. They do not appear to be responsive to the as-yet-unfulfilled Dodd-Frank requirement of expressing the ratio between CEO compensation and the compensation of all employees; the SEC proposed rules in that regard in 2013 (again, years late as against the statutory requirement), but the SEC is not expected to finalize those highly convoluted (and likely non-edifying) ratio rules at least until the second half of 2015.
All of this regulation of course begs the question of the efficacy of disclosure tools in the actual control of “excessive” executive compensation. The previously adopted “say-on-pay” regulations, much touted, have done little to control executive comp. Boards of directors are slow to admit psychologically that they are hiring people who are in the lower half of the quality scale (implicitly equating compensation with executive ability). Whether these new public disclosures, if and when finally adopted, will be effective is highly problematical; indeed, calculation of CEO compensation as against shareholder return already is being deeply analyzed by activist investors based upon information now calculable under the current disclosure regime.
It may be that activist shareholders, together with shareholder advisors such as ISS, ultimately will be the drivers for any capping of CEO or executive compensation.