The Advisors' Blog

– Subodh Mishra, ISS Governance Exchange

The Council of Institutional Investors is voicing concern to Securities and Exchange Commission officials over comments from some corporations championing the use of “realized pay” in conjunction with disclosures required under Section 953(a) of the Dodd-Frank Act. In an Aug. 16 letter to the SEC, the CII says some issuers “appear to be advocating [for the use of realized pay] as an alternative to total compensation as currently defined” in the summary compensation table.

Decrying such an approach, the CII warns over the potential to include in pending pay-for-performance disclosure rulemaking only pay elements that are performance-based. Potentially excluded were disclosures based on realized pay are: the value of new/unvested restricted shares; the amount of deferred compensation accruals; the amount of changes in pension values/compensation; and other amounts of compensation that will not actually be received in the current year. “In our view, while not all compensation directly relates to performance, investors remain keenly interested in understanding the relationship between all pay and performance,” wrote CII General Counsel Jeff Mahoney. “Regardless of whether a given component of pay is deemed to be directly related, indirectly related or unrelated to performance, investors want to know the connection between the capital they provide and the performance delivered in return. Thus, we do not think it is appropriate to exclude changes in pension values, or the other forms of compensation described above, from a pay-for-performance disclosure.”

Exclusions of some components of compensation from the pay-for-performance disclosure would convey to investors that a bright line exists between performance-based pay and other forms of pay, when in practical terms that line is not always clear, Mahoney added.

The CII also said it was concerned that allowing for such exclusions would “have the unintended consequence” of encouraging companies to game the system by decreasing performance-based pay and increasing non-performance-based pay not subject to pay-for-performance disclosures. “This perverse outcome flies in the face of investors’ decades-long efforts to promote performance-based pay,” Mahoney wrote.