The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

April 29, 2015

Today’s P4P Proposal: Back to the Future?

Broc Romanek, CompensationStandards.com

Here’s a note from Ameriprise Financial’s Thomas Moore in response to my blog last week:

Many thanks for your very helpful thoughts on the pending SEC’s pay-for-performance rule proposal. Ever since Dodd-Frank was proposed, I have been puzzled as to the need for this rule given the SEC’s comprehensive 2006 executive compensation disclosure reform and the advent of the CD&A. In 2006, the SEC tried to eliminate the five-year TSR graph in the belief that it was outdated: “since the disclosure in Compensation Discussion and Analysis regarding the elements of corporate performance that a given company’s policies might reach is intended to allow broader discussion than just that of the relationship of compensation to the performance of the company as reflected by stock price.”

Although the SEC accommodated investors who wanted the graph retained as a ready source of TSR information by requiring that it be presented in the glossy annual report, the SEC continued to believe that presenting the performance graph as compensation disclosure weakened the CD&A’s objective to provide a broad discussion of the various elements of corporate performance that determine executive compensation.

All of this takes us back to 1992, when the SEC first required the stock performance graph in response to the seemingly never ending controversy of pay for performance. Once the graph was adopted, some persons began to express concerns that it over emphasized the relationship between TSR and compensation and possibly encouraged earnings management and fraud. So, in 2006 the SEC rightly recognized the many different measures of financial performance that modern executive comp programs use to determine compensation and divorced the graph from executive compensation – banishing it to the annual report – although companies could also include it in their proxy statements if they wished.

Just four years later in 2010, Congress adopted Dodd-Frank – with Section 953(a), “Disclosure of Pay Versus Performance” – leaving many of us responsible for drafting a CD&A shaking our heads. It’s 23 years back to the future, with TSR once again tied to executive compensation disclosure and our shareholders footing the disclosure costs. Will say on pay become a referendum on TSR performance?

This WSJ article and Bloomberg article previews the SEC’s open Commission meeting today, during which the Dodd-Frank pay-for-performance rules will be proposed. Also weigh in on whether you want us to conduct a webcast on this new proposal:

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