Five years after Dodd Frank was passed into law, the Securities and Exchange Commission continues to crank out proposals for various parts of the regulation. The latest comes Wednesday morning when the SEC's staff will deliver its recommendations to the commissioners on how companies should disclose and calculate pay-for-performance figures for top executives.
"The language in Dodd-Frank specified that there be a correlation between executive compensation paid and the performance of the company," said Margaret Engel, a partner with Compensation Advisory Partners. "So there are big questions on what that might mean."
The rule, Section 953 of the Dodd Frank Act, will dictate whether companies are given free rein or a narrow set of metrics to use in evaluating a company's performance. It should also clarify how companies calculate pay, either as a sum indicated in a proxy's summary compensation table, or possibly as realized or realizable pay.
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"Every company does it differently," said Steve Seelig, executive compensation counsel at Towers Watson. "That is why required disclosure is going to be important.
Eighty-five percent of large-cap companies calculate pay by adding up the numbers in a summary compensation table, Seelig said. These numbers might include salary, cash bonuses, option grants, stock grants, restricted stock units, the change in the value of a pension and perquisites. What is important here is that the value of the stock and option grants are recorded as the value they are on the date of the grant. This calculation does not include any possible appreciation or depreciation of the options or grants.
Pay experts speculate the SEC staff may recommend companies calculate pay on a realized basis, which mirrors what a person might have on their W-2. This would include salary, cash bonuses and the value of options exercised in a certain year, and the value of any shares that vested that year.
Another option the staff might recommend would be to calculate pay on a realizable basis. This looks at what a person's compensation for a certain time period is worth on a certain date. This might include salary, cash bonuses, perks and the value of options or shares granted over a three-year period. The shares and options would then be marked up or down, depending on the stock price the day the realizable pay was calculated.
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Pay of course, is only one part of the calculation. The other part will be performance. Questions abound about whether the staff will recommend companies use a single metric like Total Shareholder Return to measure its performance, or a number of them including TSR, net income, revenues or operating margins.
Seelig points out that other questions are expected to be answered by the staff as well. Questions like how many executives will be covered by the new rule? Is it just the named executive offices (NEOs), or will it include a bigger group? Over what time period will pay be considered? One year, three years, five? And what should a company compare its performance to: a certain peer group, an index?
The SEC declined comment.
The meeting will take place at 10 a.m. on Wednesday.