On August 25, 2022, the Securities and Exchange Commission adopted a final pay for performance rule.  The pay for performance rule implements the Dodd Frank Act rulemaking mandate contained in Section 953(a) of the Act.  That section required adoption of a rule that would mandate that public companies describe the relationship between compensation paid to executives and the companies’ financial performance.  The rule had initially been proposed in 2015 and the SEC reopened the comment period on the proposal in January 2022.

As noted in the SEC’s press release on the rule’s adoption, the amendments will require that public companies provide a table that discloses specified executive compensation and financial performance metrics for their five most recently completed fiscal years. Companies will be required to report total shareholder return, or TSR, the TSR of peer companies, net income and a financial metric of its choosing.  Using the information presented, the company will be required to describe the relationship between compensation and performance, as well as comparative information versus peers.  The final rules will become effective 30 days following publication of the release in the Federal Register. Registrants must begin to comply with the new disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.

Commissioner Peirce dissented, noting in her comments that the approach taken by the SEC was a “sweeping and complex prescriptive approach that is not required under the statute.”  The Commissioner pointed out that “[o]f greater concern than the specific compliance costs, 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 detailed client alert will follow.

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