[This post revises and updates my earlier post primarily to reflect in greater detail the contents of the proposing release.]

Last week, without an open meeting, the SEC finally adopted a new rule that will require disclosure of information reflecting the relationship between executive compensation actually paid by a company and the company’s financial performance—a new rule that has been 12 years in the making. In 2010, Dodd-Frank, in Section 953(a), added Section 14(i) to the Exchange Act, mandating that the SEC require so-called pay-versus-performance disclosure in proxy and information statements. The SEC proposed a rule on pay versus performance in 2015 (see this PubCo post and this Cooley Alert), but it fell onto the long-term, maybe-never agenda until, that is, the SEC reopened the comment period in January (see this PubCo post). According to SEC Chair Gary Gensler, the new 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.” In the adopting release, the SEC articulates its belief that the disclosure “will allow investors to assess a registrant’s executive compensation actually paid relative to its financial performance more readily and at a lower cost than under the existing executive compensation disclosure regime.” For the most part, although there is some flexibility in some aspects of the new rule, the approach taken by the SEC in this rulemaking is quite prescriptive; the SEC opted not to take a “wholly principles-based approach because, among other reasons, such a route would limit comparability across issuers and within issuers’ filings over time, as well as increasing the possibility that some issuers would choose to report only the most favorable information.” Commissioners Hester Peirce and Mark Uyeda dissented, and their statements about the rulemaking are discussed below.

The new rule will become effective 30 days following publication of the release in the Federal Register. Generally, for most companies, the new disclosures will be required for the 2023 proxy season; more specifically, companies will be required to comply with the new disclosure requirements in proxy and information statements that are required to include Item 402 executive comp disclosure for fiscal years ending on or after December 16, 2022.

Final amendments

Summary

The amendments add new Item 402(v) of Reg S-K, which will require companies to describe the relationship between executive comp actually paid and the financial performance of the company for the five most recently completed fiscal years in proxy or information statements in which executive compensation disclosure is required.

Item 402(v) will require companies to provide a table disclosing specified executive comp and financial performance measures for the principal executive officer and, as a “mean” average, for the other named executive officers (as defined in Item 402 for all companies and for smaller reporting companies, respectively). To allow investors to assess whether changes in the composition of the NEO group led to changes in the average compensation reported from year to year, companies will also need to identify in a footnote the individual NEOs whose compensation is included in the average for each year. The table will include a measure of total comp (taken from the Summary Comp Table), as well as a measure reflecting “executive compensation actually paid,” a complex calculation prescribed by the rule. In addition, the table will include as financial performance measures “total shareholder return” for both the company and for its peer group, as well as the company’s net income and a financial performance measure selected by, and specific to, the company that the company believes “represents the most important financial performance measure,” not otherwise in the table, that the company uses to link compensation actually paid to its NEOs to company performance for the most recently completed fiscal year (referred to as the “Company-Selected Measure”). In years when a company had multiple PEOs, the company would need to include separate SCT total comp and comp actually paid columns for each PEO.

The company will also be required to “clearly describe,” using the information presented in the table, the relationships between compensation actually paid to the PEO and the mean average paid to the remaining NEOs and three measures of the company’s financial performance: cumulative TSR; net income; and the Company-Selected Measure, again over the five most recently completed fiscal years. The company will also need to describe the relationship between the company’s TSR and the weighted TSR of its peer group over the same period. SRCs can take advantage of scaled disclosure, describing only the measures they are required to include in the table and for their three, rather than five, most recently completed fiscal years.

Finally, the company (other than an SRC) will also be required to provide an unranked tabular list of three to seven of the most important financial performance measures—which must include the Company-Selected Measure—used by the company to link executive comp actually paid to the NEOs during the last fiscal year to company performance. Companies may also include non-financial performance measures in this list if they considered those measures to be among their “most important” measures. This requirement represents a change from January, when the SEC said, in the reopening release, that it was considering whether to require companies to list, in tabular format, their five most important performance measures used over the time horizon of the disclosure, ranked in order of importance. Companies may also voluntarily provide supplemental measures of compensation or financial performance or other supplemental disclosures, so long as they are “clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure.”

The rules will apply to all reporting companies, except foreign private issuers, registered investment companies and emerging growth companies. SRCs may provide scaled disclosures. All companies, other than SRCs, will be required to provide the pay-versus-performance disclosure for the five most recently completed fiscal years—three for SRCs. SRCs will be required to provide the disclosure for the last two fiscal years in the first applicable filing after the rules become effective; and all other registrants will be required to provide the disclosure for three fiscal years in the first applicable filing after the rules become effective, and to provide disclosure for an additional year in each of the two subsequent annual proxy filings where disclosure is required.

New Reg S-K Item 402(v) will require disclosure only in proxy or information statements for which disclosure under Item 402 is required; the information will not be deemed incorporated into any other filing, unless specifically incorporated by reference by the company. Consistent with the language of Section 14(i), the new disclosure requirement will make the information available when shareholder action is to be taken with regard to an election of directors or executive compensation. Companies will have flexibility in determining the location of the disclosure in the proxy statement.

The final rules require companies “to separately tag each value disclosed in the table, block-text tag the footnote and relationship disclosure, and tag specific data points (such as quantitative amounts) within the footnote disclosures, all in Inline XBRL.”

Pay-versus-performance table

The new required table is designed to “allow investors to more easily understand and analyze the relationship between pay and performance.”

Below is a copy of the SEC’s table to be included in proxy statements:

Pay Versus Performance

Asterisks indicate portions of the table from which SRCs are exempt. The bracketed caption “Company-Selected Measure” would be replaced with the actual name of the company’s most important measure as selected by the company. Companies will be required to provide footnotes to the table disclosing the amounts that were deducted from, and added to, the SCT total comp amounts reported in columns (b) and (d) to calculate executive comp actually paid as reported in columns (c) and (e). Footnotes must also include the name of each PEO and of each other NEO included in the calculation of the average NEO comp, as well as the fiscal years in which they are included.

Comp actually paid. Here’s one of the more complex aspects of the new rule—it took the SEC about 30 pages to describe how to determine comp actually paid. As proposed, “executive compensation actually paid” under Item 402(v) would be the total comp as reported in the SCT, modified to adjust the amounts included for pension benefits and equity awards. However, commenters noted that the proposal could result in “some misalignment between the time period to which pay is attributed and the time period in which the associated performance is reported.” As a result, the final rules will require equity awards to be revalued more frequently than as proposed.

Pension benefits. Under the rule, companies will need to deduct from SCT total comp “the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans, and add back the aggregate of two components: (1) actuarially determined service cost for services rendered by the executive during the applicable year, as proposed (the ‘service cost’); and, in a change from the proposal in response to comments, (2) the entire cost of benefits granted in a plan amendment (or initiation) during the covered fiscal year that are attributed by the benefit formula to services rendered in periods prior to the plan amendment or initiation (the ‘prior service cost’),” in each case, calculated in accordance with U.S. GAAP. The “change in actuarial present value, generally, reflects the difference between the actuarial present value of accumulated benefits at the end of the fiscal year and at the end of the prior fiscal year” and would be deducted only if the value is positive. FASB ASC Topic 715 defines “service cost” as “the actuarial present value of benefits attributed by the pension plan’s benefit formula to services rendered by the employee during the period” and notes that the measurement of “service cost reflects certain assumptions, including future compensation levels to the extent provided by the pension plan’s benefit formula.”

The SEC believes that this approach is appropriate because it “reflects the benefits an executive may expect to receive based on additional service the executive provided during the year (or service cost), and it incorporates additional benefits attributable to changes in the pension contract between the executive and the company (or prior service cost). In many cases, this measure will approximate the value that would be set aside currently by the registrant to fund the pension benefits payable upon retirement for the service provided, and any plan amendments made, during the applicable year.” In addition, the SEC observes that the approach is “closely associated with underlying information from the GAAP financial statements,” allowing the company to “calculate service cost and prior service cost for a subset of employees for which the underlying information is already available and subject to internal control over financial reporting” from data collected for the audited financial statements.

Deferred comp. As proposed, the final rules require that executive comp actually paid include above-market or preferential earnings on deferred compensation that is not tax qualified. Like pension awards, the SEC believes that “these amounts may be viewed to approximate the value that would be set aside currently by the registrant to satisfy its obligations in the future. In addition, excluding those amounts would be inconsistent with the approach in the Summary Compensation Table, which requires disclosure of the underlying deferred amounts when earned.” Companies will not be allowed to voluntarily exclude unvested amounts of deferred compensation that is not tax qualified.

Equity awards. As proposed, equity awards would have been viewed as “actually paid” on the date of vesting, and valued at fair value on that date, rather than using the fair value on the date of grant as required in the SCT. The SEC noted that vesting date fair value of stock awards is already disclosed in a required proxy table (Option Exercises and Stock Vested Table) and the “vesting date fair value of option awards can be calculated using existing models and methodologies.” There was a lot of pushback, however, with commenters arguing that “the calculation of fair value is time consuming and expensive.” Moreover, several commenters contended that “vesting date reporting of equity would lead to a timing misalignment between actual performance and executive compensation actually paid, as the performance that ‘earned’ the equity would have occurred between the grant date and the vesting date, but only the total amounts of equity would be reported on the vesting date.”

In response to these and other comments, the SEC modified its approach by adjusting the date on which the award is valued, so that “the first fair value disclosure is made in the year of grant, and changes in value of the award are reported from year to year until the award is vested.” That is, the rule will “first require the year-end reporting and valuation of awards granted during the fiscal year and then the year-over-year change in fair value of such awards until the vesting date (or the date the registrant determines the award will not vest).” The SEC believes that this approach “will better align the timing of the disclosure and valuation with when the award is actually ‘earned’ by the executive, resulting in disclosure that more clearly shows the relationship between executive compensation and the registrant’s performance.” More specifically, the final rules will require the deduction of the equity award amounts reported in the SCT total, and the addition (or subtraction, as applicable) of the following:

If, during the last completed fiscal year, the company repriced or otherwise materially modified options or SARs held by an NEO, the changes in fair value must take into account the excess fair value, if any, of any modified award over the fair value of the original award as of the date of the modification. For awards that are subject to performance conditions, the change in fair value as of the end of the covered fiscal year will be calculated based on the probable outcome of those conditions as of the last day of the fiscal year.

The SEC believes that this revised approach in the final rules “will more effectively allow registrants to describe the relationship between compensation and registrant performance, as the reported amounts of compensation will annually adjust based on the registrant’s performance, among other things, in that year.” In addition, investors will “be able to more easily understand the impact of performance on awards-based compensation over time, because under the final rules as adopted investors will be able to observe the amount by which the value of an executive’s compensation changes each year, rather than only observing the value of that compensation in the year an award vests.” As proposed, for the value of equity awards, the final rules will also require footnote disclosure of any valuation assumptions that materially differ from those disclosed as of the grant date for those awards.

Performance measures. The final rules specify inclusion in the pay-versus-performance table of several financial performance measures.

TSR. Notwithstanding a substantial split of opinion among commenters, the SEC adopted, as proposed, the requirement to use TSR as a measure of financial performance of the company and to also require disclosure of peer group TSR (for companies that are not SRCs). While some commenters advocating TSR noted that the concept is well understood by investors, others contended, among other things, that it is not necessarily used by companies to determine compensation, is an “unreliable performance measure for thinly-traded stocks,” incentivizes “short-term performance at the expense of investors’ long-term best interests,” may encourage comp program adjustments to “more heavily rely on TSR,” and may require lengthy explanations of misalignments. A number of commenters also opposed requiring disclosure of peer group TSR. Nevertheless, the SEC considers TSR to be “consistent with that statutory language,” and believes that “mandating a consistently calculated measure for all registrants will further the comparability of the pay-versus-performance disclosures across registrants.” In addition, the SEC believes that “peer group TSR will provide investors with more comprehensive information for assessing whether the registrant’s performance was driven by factors common to its peers or instead by the registrant’s own strategy and other choices.”

Under the final rules, a company must disclose in the table peer group TSR (weighted according to market capitalization), using either the same peer group used for the performance graph (Item 201(e)) or a peer group used in CD&A to disclose benchmarking practices. If the peer group is not a published-industry or line-of-business index, the company must disclose in a footnote the identity of the issuers in the group (although the company may incorporate by reference if the composition of the peer group has previously been disclosed in prior SEC filings). Changes to the peer group will be treated much like changes in connection with the performance graph: if the company changes its peer group from the prior year, it must include “tabular disclosure of peer group TSR for that new peer group (for all years in the table), but must explain, in a footnote, the reason for the change, and compare the registrant’s TSR to that of both the old and the new group.”

Both TSR and peer group TSR will be calculated based on a fixed investment of one hundred dollars at the measurement point. TSR will be calculated on the same cumulative basis as in connection with the performance graph, “measured from the market close on the last trading day before the registrant’s earliest fiscal year in the table through and including the end of the fiscal year for which TSR is being calculated (i.e., the TSR for the first year in the table will represent the TSR over that first year, the TSR for the second year will represent the cumulative TSR over the first and the second years, etc.).”

Net income. The SEC believes that using net income as a performance measure in the table will provide an accounting-based measure of financial performance that is familiar to companies and investors. Although some commenters observed that net income is not often used by companies in setting compensation, the SEC believes that net income is closely related to other profitability measures that staff experience suggests are used and are widely understood and standardized. In addition, inclusion of net income “could complement the market-based performance measure of TSR” and could provide a standard baseline for investor analysis. To avoid excessive duplication, the SEC elected not to also require, as proposed, disclosure of income or loss before income tax expense.

Company-Selected Measure. Under the final rules, companies must disclose in the table a Company-Selected Measure that is a financial performance measure, included in the “Tabular List” (discussed below), that, in the company’s assessment, represents the most important performance measure (not otherwise in the table) used by the company to link NEO compensation actually paid, for the most recent fiscal year, to company performance. If the most important measure were already in the table, companies would need to select the next most important measure. The SEC believes that the measure will “provide investors with useful context for understanding the measures actually used by registrants in their compensation programs.” Although disclosure of the calculation methodology is not required, the SEC advises companies to consider if disclosure of the calculation methodology would be helpful to investors, either to understand the measure or prevent its being confusing or misleading. To the extent that companies have other measures they believe are important, they may include them as new columns in the table, so long as they are not misleading, don’t obscure the required information, and are not presented with greater prominence than the required disclosure. The Company-Selected Measure must be a financial performance measure and the determination of “most important” must be based on the most recently completed fiscal year and otherwise determined in the same way as the tabular list. Companies may change the measure from one filing to the next. To the extent that a company believes that a non-financial measure is really its most important measure, it can provide supplemental disclosure. When a selected measure is a non-GAAP financial measure, consistent with CD&A, the measure will not be subject to Reg G and Item 10(e) of Reg S-K, but the company must provide disclosure regarding the calculation of the number from the audited financial statements.

Tabular list of “most important” performance measures

Although not a column in the pay-versus-performance table, the final rules require companies to provide an unranked tabular list of the three to seven most important financial performance measures used to link executive comp actually paid during the fiscal year to company performance. Notably, as discussed below, non-financial performance measures may also be included. “Financial performance measures” are “measures that are determined and presented in accordance with the accounting principles used in preparing the issuer’s financial statements, any measures that are derived wholly or in part from such measures, and stock price and total shareholder return. A financial performance measure need not be presented within the financial statements or otherwise included in a filing” to be included on the tabular list or as the Company-Selected Measure. “Non-financial performance measures” are performance measures other than those that fall within the definition of financial performance measures. (For example, some ESG measures might be important non-financial performance measures.)

In the proposal, the SEC had suggested including a ranked list of five financial performance measures, but some commenters objected to the ranking aspect, contending that it was too simplistic and difficult to satisfy, because companies “do not rank their measures in the compensation setting process and measures can interact in determining pay in complex ways.” Some commenters also offered differing views on the meaning of “most important.”

In response to comments, the final rules require a list of three to seven financial performance measures and do not require that the list be ranked or that the methodology used to calculate the measures be described, although, as with the Company-Selected Measure, the SEC advises companies to consider if disclosure of the calculation methodology would be helpful to investors, either to understand the measure or prevent its being confusing or misleading. The determination of importance will be based on the most recently completed fiscal year, but there is otherwise no further guidance on the concept of “most important.” Companies that consider fewer than three financial performance measures need disclose on the list only the number of measures they actually consider; companies that did not consider any financial performance measures need provide a list. Companies may elect to include non-financial performance measures “only if such measures are included in their three to seven most important performance measures, and they have disclosed at least three (or fewer, if the registrant only uses fewer) most important financial performance measures.”

Companies may present one tabular list, separate the list into one list for the PEO and one for the remaining NEOs, or even do a separate list for each NEO. If the company uses multiple lists, each list must include at least three, and up to seven, measures that, in the assessment of the company, represent the most important financial performance measures used to link comp actually paid “to that, or those, particular named executive officer, or officers, for the most recently completed fiscal year, to company performance.” At their option, companies may cross-reference to other disclosures “in the applicable disclosure document that describe the registrant’s processes and calculations that go into determining NEO compensation as it relates to these performance measures.” The SEC believes that the tabular list will help investors assess which performance measures have the most impact and provide investors with helpful context for interpreting the pay-versus-performance disclosure.

Clear description of relationship between compensation actually paid and performance

Under the final rules, using the information in the pay-versus-performance table, companies will be required to provide “clear descriptions” of several relationships, over the five-year period: the relationship between executive comp actually paid to the PEO and, on average, to the other PEOs, and the company’s TSR; the relationship between the company’s TSR and peer group TSR; the relationship between executive comp actually paid and net income; and the relationship between executive compensation actually paid and the Company-Selected Measure. The clear descriptions do not need to be presented together. In addition, if the company elects to provide any additional performance measures in the table, each additional measure must also be accompanied by a clear description of the relationship between executive comp actually paid and that measure. In this context, instead of highly prescriptive rules, the rules offer more flexibility. The required “clear description” of the relationships between compensation actually paid and the financial performance measures included in the pay-versus-performance table may be provided in narrative, graphical, or combined narrative and graphical format. As one example, the release suggests that “the required relationship disclosure could include, for example, a graph providing executive compensation actually paid and change in the financial performance measure(s) (TSR, net income, or Company-Selected Measure) on parallel axes and plotting compensation and such measure(s) over the required time period. Alternatively, the required relationship disclosure could include narrative or tabular disclosure showing the percentage change over each year of the required time period in both executive compensation actually paid and the financial performance measure(s) together with a brief discussion of how those changes are related.” The SEC encourages companies “to present this disclosure in the format that most clearly provides information to investors about the relationships, based on the nature of each measure and how it is associated with executive compensation actually paid.”

Permitted Additional Disclosure

Under the final amendments (and “plain English” principles), companies will be permitted to provide additional disclosure about pay versus performance beyond the specific requirements, “so long as doing so would not be misleading and would not obscure the required information.” Companies could also include additional compensation and performance measures, or additional years of data, in the new pay-versus-performance table. Again, any supplemental measures of compensation or financial performance and other supplemental disclosures “must be clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure. For example, depending on the facts and circumstances, a registrant could use a heading in the table indicating that the disclosure is supplemental, or include language in the text of its filing stating that the disclosure is supplemental.”

Transition

Companies will be required to comply with new rules in proxy and information statements that are required to include disclosure under Item 402 of Reg S-K for fiscal years ending on or after December 16, 2022. That means that, for most companies, the new rules will be applicable for the 2023 proxy season.

In the first applicable filing after the rules become effective, companies will need to provide the disclosure for the last three fiscal years and to provide disclosure for an additional year in each of the two subsequent annual proxy filings where disclosure is required; however, SRCs will be required to provide disclosure only for the last two fiscal years in the first applicable filing. For newly public companies, information for fiscal years prior to the last completed fiscal year will not be required if the company was not a reporting company under Section 13(a) or 15(d) of the Exchange Act at any time during that year.

Scaled disclosure for SRCs.

As noted above, SRCs will have to provide only three years of disclosure. In addition, SRCs will not be required to provide peer group TSR, a Company-Selected Measure, a tabular list, or disclose amounts related to pensions. Finally, SRCS will be able to phase-in XBRL: they will not be required to provide the required Inline XBRL data until their third filings in which they provide pay-versus-performance disclosure, instead of in the first filing.

Statements of Commissioners

Chair Gensler. In addition to his comments quoted above, in his statement, Gensler indicated that he was “pleased that the final rule provides for new disclosures, describing which performance measures a company deems most important when determining what it pays executives. When we reopened the proposal, we asked about requiring companies to name and rank the five most important factors they used for this determination. Based on public comment, the final rule includes a more flexible requirement, allowing companies to disclose the three to seven most important measures in an unranked list.”

Commissioner Peirce. In her dissenting statement, Peirce characterized the rulemaking as lacking in clarity and “unnecessarily complicated.” While the statute “mandates a ‘clear description’ of executive compensation’s relationship to performance,” she contends, the rule is really a “mish-mash of prescribed elements” that “will elicit costly, complicated, disclosure of questionable utility.” She would have preferred a “principles-based approach [that] would have allowed companies to provide a ‘clear description’ of the pay-performance relationship tailored to their circumstances.” She cites, as an example of the complexity, the “complicated formula for determining compensation ‘actually paid’ to the executive officers, including some metrics that most companies ordinarily would not calculate.”

Given that companies already provide a detailed CD&A, the primary benefit of the new rule, she suggests, is “in the new presentation of information that generally is already disclosed elsewhere and the comparability the Commission hopes the tabular presentation will produce. But, the fundamental variation across companies’ compensation practices and the underlying assumptions some of the disclosures necessitate will render the new presentation anything but clear and comparable.” Instead, she argues, the “tabular approach masks the variety of approaches companies take to linking pay and performance…. Moreover, the table includes measures that may not be relevant for a particular company, which will be useless at best and confusing at worst for investors.” The SEC has acknowledged, she observed, that, “among companies and investors, there ‘continues to be no consensus around the best approach to analyzing the alignment of pay and performance. . . .’” a view reinforced by the public comments.

In addition, the new metrics and the related complexity will drive costs higher, costs that will be disproportionately greater for smaller companies. For example, the requirement to identify the company’s “most important” performance measure may be “a difficult task for many companies that take nuanced approaches to compensation.”

More significantly, she expressed her concern that

“this rulemaking could distort how public companies compensate executives and how investors evaluate companies’ compensation decisions. Shining a spotlight on specific performance measures could drive compensation decisions instead of simply informing investors about how companies make those decisions. Companies may feel compelled to tie their executive pay to the prescribed financial performance measures or to incorporate non-financial performance measures, such as environmental, social, and governance metrics. The highlighting of particular metrics also might influence how investors analyze the relationship between pay and performance. A principles-based approach would have enabled us to follow one commenter’s wise counsel to ‘leave judgements as to how to incentivize executives to compensation committees and how to evaluate company performance to investors.’”

She concluded that, “[w]hen Congress instructs the Commission to act, we should do so. Congress told us over a decade ago to adopt a pay versus performance rule. I would have supported a principles-based rulemaking that efficiently implemented Congress’s directive without unnecessary additions.”

Commissioner Caroline Crenshaw. Crenshaw’s statement indicates that the new rulemaking is really about creating transparency with regard to executive pay. Dodd-Frank was enacted following the global financial crisis of 2007-2008, which “put the lack of transparency into stark relief, as executives received multimillion-dollar pay packages for short-term gains that contributed to disastrous results.”

There have also been many developments in pay practices since the rules were first proposed in 2015. For example, she observes that,

“in 2010, more pay was based solely on financial measures such as profitability, revenues, and measures of cash flow. But, as several commenters noted, the underlying performance measures that are used to determine executive pay in today’s market for executive compensation encompass a broader mix—both quantitative and qualitative; financial and nonfinancial. Further, roughly 70% of executive pay plans consider nonfinancial measures, and these can include employee engagement, customer service, and safety. Investors and other stakeholders commented on this rule to assert that a complete picture of executive pay and performance would include disclosure of both financial and nonfinancial measures used by a registrant to pay executives.”

In response to these new market developments, as well as public comments, “the final Pay Versus Performance rule made a change from what was proposed to permit companies to include nonfinancial performance measures in a list of their three to seven ‘most important’ measures and also disclose such measures in a table as they see fit. By contrast, financial measures are required to be disclosed if companies are linking pay and performance to them. It remains to be seen whether companies will make sufficient disclosures to investors through permissive inclusion of nonfinancial measures versus requiring disclosure on the same footing as financial measure.”

Commissioner Uyeda. Uyeda’s primary concerns, as expressed in his dissenting statement, were largely procedural. First, like Peirce, he expressed some exasperation at the lapse of 12 years to final rulemaking: “Although this provision lacks a statutory deadline, it is unacceptable for more than twelve years to elapse before fulfilling a Congressional mandate.” But his real gripe was with the failure, in his view, to comply with the APA and issue a re-proposal: “no provision of the Dodd-Frank Act exempts the Commission from having to comply with the Administrative Procedure Act. Rather than taking the more appropriate route of re-proposing the pay versus performance rule with updated data and analysis, the Commission bypassed having an effective notice-and-comment process as required by the Administrative Procedure Act in favor of a procedural shortcut.”

The release reopening the comment period “did not update any economic analysis, benefits and costs discussion, or analysis required by the Paperwork Reduction Act and the Regulatory Flexibility Act. In contrast, the 2015 Proposal included nearly 34 pages of economic analysis assessing the impact of the proposed rule. Thus, the public, in providing new comments on the rule, could only respond to a seven-year old economic analysis. The use of stale information is particularly puzzling given the Commission’s stated focus on obtaining robust economic data.” It was also inconsistent, he contends, with staff guidance on economic analyses. He notes, for example, that the economic analysis in the 2015 proposal was especially “problematic because the data on the use of executive stock grants and stock options grants in that release was from 2010 and 2012, while other data on the vesting of options grants ranged from 1997–2008. The Adopting Release, in contrast, includes economic analysis reflecting more recent trends in executive compensation from 2020. Most notably, the 2020 data indicates a significant move away from the use of stock options and pension plans as a form of executive compensation.” That data, he contends, might have made a difference to the public.

Nor was any economic analysis provided regarding the new regulatory alternatives included in the reopening release. He quotes (with apparent approval) a comment from the Chamber of Commerce that a re-proposal would have been a more appropriate approach. While the adopting release asserts that the reopening release “discussed the potential benefits and costs of the additional disclosures even in the absence of a standalone economic analysis” and made inquiry about new developments, that, in his view, was “insufficient.” The SEC, he asserts, “should have gathered any known data and moved forward in the form of a re-proposal. Moreover, given the short 30-day comment period, the public’s ability to generate their own economic analysis was limited at best and illusory at worst.”

Finally, he maintains that the analysis dramatically understates the cost burden of compliance by using $400 per hour as an estimate of the average cost of outside professionals; however, he points out, the SEC “first started using the $400 per hour in 2006—over sixteen years ago—and it is not credible that the cost for professional legal advice has remained flat since that time.” While he was unable to support this rule, had the SEC “re-proposed this rule for public comment after updating the stale data and economic analysis, I would have been open to supporting the adoption of a final rule.”

Commissioner Jaime Lizárraga. As the newest SEC commissioner, Lizárraga kept his statement brief. In his view, a “key factor driving the 2008 global financial crisis was the stark misalignment of incentives that led executives to take excessive, catastrophic risks. Congress initially addressed this problem by directing the U.S. Treasury Secretary to subject all recipients of taxpayer-assistance to executive compensation restrictions as a condition of such assistance. The Dodd-Frank Act then addressed the absence of a disclosure standard by requiring the Commission to undertake today’s rulemaking, which will now bring much-needed transparency, comparability, and clarity into the relationship between executive compensation and a company’s financial performance.” This rulemaking, he contended, together “with other Dodd-Frank Act financial stability provisions, this rulemaking will reduce the likelihood of future taxpayer bailouts.”

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