Activist investors often target executive pay as a reason for removing underperforming bosses, and data on pay and results is often a big conversation point in the market. The SEC is trying to lift the lid on the space, although such a move may prove controversial.

Registered firms must disclose links between what corporate executives are paid and a business’s performance, following rule changes announced yesterday by the Securities and Exchange Commission.

The SEC said the rules implement a requirement mandated by the Dodd-Frank Act (2010). The SEC proposed pay versus performance disclosure rules as far back as 2015. It reopened the comment period on the proposal this January.

The changes come at a time when corporate pay – and how it fits with results on the ground – remains a sensitive political as well as financial issue. The move is also an example of the kind of activist approach under current SEC chair Gary Gensler. The SEC has also taken the controversial step of forcing companies to disclose their ESG exposures. That step prompted political pushback from legislators who said the SEC was exceeding its  brief.

Disclosure
“The Commission has long recognized the value to investors of information on executive compensation,” Gensler said. 

“Today’s rule makes it easier for shareholders to assess a public company’s decision-making with respect to its executive compensation policies. I am pleased that the final rule provides for new, more flexible disclosures that allow companies to describe the performance measures it deems most important when determining what it pays executives. I think that this rule will help investors receive the consistent, comparable, and decision-useful information they need to evaluate executive compensation policies.”

The details
Specifically, the amendments require registrants to provide a table setting out specified executive compensation and financial performance measures for their five most-recently completed financial years. 

A SEC-registered entity must report its total shareholder return (TSR), the TSR of companies in the registrant's peer group, its net income, and a financial performance measure chosen by the registrant, the regulator said.

Using the information presented in the table, registrants will be required to describe the relationships between the executive compensation actually paid and each of the performance measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group.